1099 Solo 401k Question

[milkycow]

I don't know if this is a misnomer, I may not have yet made the connection. On the WCI podcast there has been mention of doing a solo 401k or opening one even if you just make a little money by doing surveys.

Is solo 401k contribution not limited by how much you make 1099, or if you are a W-2 worker and and do like 1 1099 shift a year in the ER but the bulk of your income is all W-2, you can contribute to your W-2 income to max out that solo 401k?

 

[DMFA]

No. The maximum employer contribution to an individual 401(k) is 20% net profit. If you worked one shift with $2000 net profit (after expenses and half self-employment tax), you can only contribute $400 to the individual 401(k).

I imagine you're maximizing employee deferrals through your usual W-2 employed job?

The biggest purpose to open up a tiny individual 401(k), such as with survey money, is to serve as a rollover receptacle for pretax IRAs to enable tax-free Roth conversions for non-deducted basis, such as the Backdoor Roth. Otherwise it's fairly paltry.

[MPMD]

DMFA wrote:

No. The maximum employer contribution to an individual 401(k) is 20% net profit. If you worked one shift with $2000 net profit (after expenses and half self-employment tax), you can only contribute $400 to the individual 401(k).

I imagine you’re maximizing employee deferrals through your usual W-2 employed job?

The biggest purpose to open up a tiny individual 401(k), such as with survey money, is to serve as a rollover receptacle for pretax IRAs to enable tax-free Roth conversions for non-deducted basis, such as the Backdoor Roth. Otherwise it’s fairly paltry.

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if that's the case i screwed it up.

i was doing [hours] x [rate] = [total pay]

[total pay] x 0.2 = solo 401k contribution

[total pay] x 0.8 x 0.396 = quarterly taxes

so i sounds like i might have overfilled it? i had talked about this with an accountant and they said my math was correct.

the only thing is that i end up itemizing deductions and i'm not sure what the interplay is there. a lot of my expenses actually come from my W2 job but my W2 job is pretty much identical to my IC job (ER doc).  i definitely don't have expenses that are specifically for my IC stuff.

now i'm worried i messed this up. it's only been about 10k total solo 401k this year so it shouldn't be the end of the world.

[DMFA]

MPMD wrote:

DMFA wrote:

No. The maximum employer contribution to an individual 401(k) is 20% net profit. If you worked one shift with $2000 net profit (after expenses and half self-employment tax), you can only contribute $400 to the individual 401(k).

I imagine you’re maximizing employee deferrals through your usual W-2 employed job?

The biggest purpose to open up a tiny individual 401(k), such as with survey money, is to serve as a rollover receptacle for pretax IRAs to enable tax-free Roth conversions for non-deducted basis, such as the Backdoor Roth. Otherwise it’s fairly paltry.

Click to expand…

if that’s the case i screwed it up.

i was doing [hours] x [rate] = [total pay]

[total pay] x 0.2 = solo 401k contribution

[total pay] x 0.8 x 0.396 = quarterly taxes

so i sounds like i might have overfilled it? i had talked about this with an accountant and they said my math was correct.

the only thing is that i end up itemizing deductions and i’m not sure what the interplay is there. a lot of my expenses actually come from my W2 job but my W2 job is pretty much identical to my IC job (ER doc).  i definitely don’t have expenses that are specifically for my IC stuff.

now i’m worried i messed this up. it’s only been about 10k total solo 401k this year so it shouldn’t be the end of the world.

Click to expand...

Maximum individual 401(k) contribution: 0.2 · (1 - [SE tax ÷ 2]) · (income - expenses). So if you're claiming no expenses on schedule C, then you've only overshot by a fifth of 1.45% (half your self employment tax, which is p much just the 2.9% Medicare since you're over the SS tax limit). This means that it's 0.2 · 0.9855 · (income - expenses) or 19.71%, assuming no expenses...so $1,971 on $10,000. If you claim no expenses, then you've over-contributed buy a whopping $29. I don't think that's particularly concerning, fortunately.

This is a slightly tough decision since any work-related expense you may have will give you the biggest deduction on schedule C (not subject to the 2% rule for employees), but it does reduce the amount you can contribute to the individual 401(k) by $0.20 per dollar. However, it seems like the deduction would give you back $0.39 on the dollar, so it seems like in the short term, it would be worth more. Up to you.

[MPMD]

DMFA you are smarter than me.

this may be the year i need to pay someone to do my taxes....

[spiritrider]

A warning.

If you have already made your one-participant 401k employer contributions for the 2017 tax year and they exceed your allowed maximum employer contribution, you likely have a problem.

This is because 401k excess employer contributions can not normally be returned. It will be a bit of a pain to clean this up if this turns out to be true.

This is why you should never maximize your 401k employer contributions during the tax year. You have until your tax filing deadline including extensions to make those contributions. You should at least wait until January because that gives you more options.

[MPMD]

I mean if I did earnings x 20% (which is what I did) it sounds like I definitely exceeded.

frustrating b/c a CPA who advertises on this site advised me that this was ok...

so what i can't figure is if it's enough to really matter or if it's fractions of pennies on the dollar as DMFA would suggest above.

my other question here is theoretically if i was able to earn a few more bucks moonlighting this calendar year i could add to the denominator and keep myself out of trouble right?

[MPMD]

spiritrider wrote:

A warning.

If you have already made your one-participant 401k employer contributions for the 2017 tax year and they exceed your allowed maximum employer contribution, you likely have a problem.

This is because 401k excess employer contributions can not normally be returned. It will be a bit of a pain to clean this up if this turns out to be true.

This is why you should never maximize your 401k employer contributions during the tax year. You have until your tax filing deadline including extensions to make those contributions. You should at least wait until January because that gives you more options.

Click to expand...

i don't think that's true is it? i thought solo 401k contributions had to be dated in the actual calendar year.

 

[DMFA]

MPMD wrote:

spiritrider wrote:

A warning.

If you have already made your one-participant 401k employer contributions for the 2017 tax year and they exceed your allowed maximum employer contribution, you likely have a problem.

This is because 401k excess employer contributions can not normally be returned. It will be a bit of a pain to clean this up if this turns out to be true.

This is why you should never maximize your 401k employer contributions during the tax year. You have until your tax filing deadline including extensions to make those contributions. You should at least wait until January because that gives you more options.

Click to expand…

i don’t think that’s true is it? i thought solo 401k contributions had to be dated in the actual calendar year.

 

Click to expand...

Here's the reference: https://www.irs.gov/publications/p560#en_US_2016_publink10009065

Has to be opened and elected for during the calendar year, but contributions have to be deposited to the account by the filing deadline (April).

If you're doing employee contributions (elective deferrals), those can't be done on money already earned.

See also Fidelity's simpler explanation than the IRS's: https://www.fidelity.com/retirement-ira/small-business/self-employed-401k/getting-started

[MPMD]

so my total IC income has been like $50k so we're talking about $10k contributions, these are all employer i max employee at W2 gig (~$250k).

my SE tax according to a calculator would be like $1200

so it sounds like I should have done $50,000 - ($1200/2) = $49,400 x 20% = $9880

delta there like DMFA said is pretty small by my calc $120

theoretically if i over contributed a little bit could i just generate a few bucks more in IC income and add to denominator to be in the clear?

 

[spiritrider]

MPMD wrote:

I mean if I did earnings x 20% (which is what I did) it sounds like I definitely exceeded.

frustrating b/c a CPA who advertises on this site advised me that this was ok…

so what i can’t figure is if it’s enough to really matter or if it’s fractions of pennies on the dollar as DMFA would suggest above.

my other question here is theoretically if i was able to earn a few more bucks moonlighting this calendar year i could add to the denominator and keep myself out of trouble right?

Click to expand...

It is 20% of self-employment earnings, just not income. Net self-employment earnings = net business profit - 1/2 SE tax and net business profit = business income - business expenses.

If you are able to earn a few more bucks and get paid for it by 12/31, such that 20% of your net self-employment earnings are >= your 2017 employer contributions that would be a good thing.

If not, it will not be the end of the world. You will have to pay a 10% excise tax on the excess employer contribution, file a form, apply the excess to next years employer contribution space and file another copy of the same form reconciling the excess contribution.

This is pretty much the same thing you do with an excess IRA or HSA contribution that is not removed in time. Only in the case of a 401k excess employer contribution, there is no opportunity to remove the excess contribution and the excise tax is 10% instead of 6%.

[MPMD]

thank you guys for talking this through.

so what i'm dealing with is that i don't have any specific expenses related to moonlighting as an ED doc so i think my business expenses would be zero.

basically a few days here and there i drive out and work a shift, submit hours, and get paid out.

my primary job is EM and this is EM.

 

[TotallyBroke]

MPMD wrote:

so what i’m dealing with is that i don’t have any specific expenses related to moonlighting as an ED doc so i think my business expenses would be zero.

Click to expand...

Check that to make sure.  I am employed (W-2) but have also done some locums on the side (not much).  However, every un-reimbursed CME expense, new scrubs, new Danskos (last ones lasted 4 years), travel to complete Board exams, license renewal, DEA renewal, etc all count as business expenses.  They are entirely relevant to my practice and I would not be able to do the locums gig without them, so they count.  Admittedly, I use them more for my employed job.  But, those deductions are available and important to me.  I'd find it hard to believe you have NO expenses.

[MPMD]

TotallyBroke wrote:

MPMD wrote:

so what i’m dealing with is that i don’t have any specific expenses related to moonlighting as an ED doc so i think my business expenses would be zero.

Click to expand…

Check that to make sure.  I am employed (W-2) but have also done some locums on the side (not much).  However, every un-reimbursed CME expense, new scrubs, new Danskos (last ones lasted 4 years), travel to complete Board exams, license renewal, DEA renewal, etc all count as business expenses.  They are entirely relevant to my practice and I would not be able to do the locums gig without them, so they count.  Admittedly, I use them more for my employed job.  But, those deductions are available and important to me.  I’d find it hard to believe you have NO expenses.

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well i do have some that i could deduct but my problem is that i didn't do that and then calculate my solo 401k contribution

so from this thread it's

[income] - [expenses] - [self employ tax /2] x 0.2 = solo 401k employer contribution

i had figured my expenses to be 0 and TBH they are pretty minuscule given that the uni reimburses me for most things (license, conferences, etc)

i'm going to have to talk to a tax professional i think since i've screwed the pooch here but my guess is that it's better for me not to itemize any biz expenses bc that would just compound the math error i think i already made.

[spiritrider]

Only business expenses exclusively required by the business should be 100% deducted on a Schedule C. Business expenses necessary for both W-2 employment and the business should be ratably deducted on the Schedule C and the personal Schedule A subject to the 2% floor. Business expenses exclusively required by the W-2 employment should be deducted on the personal Schedule A subject to the 2% floor.