401k Question

[scurry]

Hello Everyone,

I have a question regarding 401ks.

For the first half of this year, I was in a private practice and was set up as an S-corp. Because of this, I set up a solo 401k and contributed the max (53k). As of July of this year, I changed jobs and now, no longer have an S corp and am paid as a  W2 employee. After 6 months of working, I become eligible for my new group’s 401k, which in this case would be January 2017.

My question is: can I still contribute the 18k to my new group’s 401k, despite already contributing 53k to my solo 401k? If so, what is the deadline to do this for tax year 2016.

Thanks for your help.

[spiritrider]

It is not clear what you are asking.

First, you state that you become eligible for your new group's 401k in 2017. That is new year with new elective employee deferral ($18K) and annual addition ($54K in 2017) limits. What you contributed in 2016 does not matter.

If you had been eligible in 2016 and you made the full elective employee deferral to your solo 410k, then you would not be able to make any further deferrals in 2016 even though there is a separate annual addition limit for each unrelated employer.

 

[litovskyassetmanagement]

scurry wrote:

Hello Everyone,

I have a question regarding 401ks.

For the first half of this year, I was in a private practice and was set up as an S-corp. Because of this, I set up a solo 401k and contributed the max (53k). As of July of this year, I changed jobs and now, no longer have an S corp and am paid as a  W2 employee. After 6 months of working, I become eligible for my new group’s 401k, which in this case would be January 2017.

My question is: can I still contribute the 18k to my new group’s 401k, despite already contributing 53k to my solo 401k? If so, what is the deadline to do this for tax year 2016.

Thanks for your help.

Click to expand...

$18k is in common for both plans.  You can however contribute another $53k via employer contribution into the 2nd plan because it is an unrelated employer.

[DMFA]

Make sure you made enough from your S-corp ($140,000, based on the 25% limit) in those 6 months to fund the $35,000 in non-elective contributions, assuming $18,000 of it is deducted as an elective deferral from your own W-2 salary from your S-corp.

Otherwise, it seems like you're in two completely different situations for two different tax years.

If you will be earning on 1099s in addition to your W-2 job in 2017, then you could contribute the lesser of 20% of net business profits or $53,000 as (self) employer contributions, in addition to maxing your W-2 401k at $53,000 ($18,000 of which can be elective salary deferral) as long as you don't own the new group.

Where some people get hung up on the rules is:
- the $18,000 in elective deferral is across ALL 401ks
- the $53,000 total limit is for EACH unrelated employer
- S-corp can contribute up to 25% of W-2 income as employer contributions
- Self-employed/1099 can contribute up to 20% net business profit as employer contributions

...check my work, though, and make sure your financial professional is kept abreast of these changes.

[scurry]

Thanks for your replies. I was confused about my new group's 401k. I thought the deadline for 2016 401k contributions was the tax filing deadline in 2017, but the deadline is december 2016. I dont become eligible for my new group's plan until 1/17 and therefore, can't contribute to a 2016 401k with the new group. The situation has solved itself.

With regards to the minimum of $140,000 (based on the 25% limit to fund $35,000 in my solo 401k), is that a total amount of money made from the S-corp? For example, if i made approximately $200,000 from my S-corp and divided that into 140k salary and 60k distribution, would that work? Or does the total amount have to be a minimum of 140k (from which i would later divide into salary and distribution)?

Thanks.

 

 

[DMFA]

This is just a blog post, but I think this spells it out fairly well...but it may not answer that specific question: https://sdirahandbook.com/maximizing-2015-401k-contributions-with-your-s-corp/

[scurry]

That's a great article and it answers my question perfectly. Thanks so much!

[spiritrider]

I would add a few points about S-Corp solo 401k contributions.

You do have to have available sufficient net business income after all expenses (including employer payroll taxes), to make the employer contribution.

To make the full 25% employer contribution of $35K on a W-2 salary of $140K, you need to have a total of $175K in net business income.

Like any other corporate 401k, the employer contributions of an S-Corporation may be made up until the tax filing deadline (including extensions). Like any W-2 employee at any corporation the employee elective deferral must be deducted from compensation with a pay date <= 12/31 and the DOL safe harbor is 7 days for the contribution.

[scurry]

with regards to the net business income, does that include only federal employer payroll taxes or does it also include state employment taxes? If I include both, then my net business income is 162K. If I only include federal employer payroll taxes, then i meet the 175K cutoff. At this point, i have already made the 35k employer contribution.

[scurry]

based on the IRS website link (https://www.irs.gov/retirement-plans/one-participant-401k-plans), at the bottom of this email, i have pasted what looks to be relevant with regards to contribution limits.

Based on the info on the website, it looks like it is one-half of your self-employment tax. With regards to "contributions for yourself," is that referring to the 18k I placed into the 401k as an employee?

Finally, what defines a "self-employed individual" and how does one know if this calculation applies to one's situation?

From IRS website:

Contribution limits in a one-participant 401(k) plan

The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

• Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
  
  
  
  • $18,000 in 2016 and 2017, or $24,000 in 2016 and 2017 if age 50 or over; plus
  
  
  
  


• Employer nonelective contributions up to:
  
  
  
  • 25% of compensation as defined by the plan, or
  
  
  • for self-employed individuals, see discussion below
  
  
  
  

Contribution limits for self-employed individuals

You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

• one-half of your self-employment tax, and


• contributions for yourself.

[spiritrider]

A self-employed individual is either a sole proprietor or a partner in a partnership. Only self-employed individuals pay SE tax. In this case the maximum solo 401k employer contribution is 20% of (net business profit - 1/2 SE tax).

In an S-Corp you are a shareholder-employee receiving W-2 compensation and possibly distributions. The shareholder-employee pays the employee half of FICA and the employer (S-Corp) pays the employer half of FICA. In this case the maximum solo 401k contribution is 25% of W-2 compensation.

[spiritrider]

scurry wrote:

with regards to the net business income, does that include only federal employer payroll taxes or does it also include state employment taxes? If I include both, then my net business income is 162K. If I only include federal employer payroll taxes, then i meet the 175K cutoff. At this point, i have already made the 35k employer contribution.

Click to expand...

I was using net business income to refer to business income after all expenses, not including compensation, employer retirement plan contributions and distributions as a way to ensure you have enough income for the first two.

With an S-Corp you have income and deductions. In normal circumstances, you need to have more income than deductions otherwise you have a loss and there are complicated rules on deducting an S-Corp loss.

Let's look at deductions in four main categories:

1. The shareholder-employee's gross compensation is a deduction from income. The 401k elective deferral and employee share of FICA are deducted from the shareholder-employee's gross compensation in payroll and reflected in their W-2.


2. The employer payroll taxes. This includes the employer's share of FICA, federal/state unemployment insurance, workmen's comp, etc...


3. Employer Retirement plan contributions.


4. All other business deductions.

Income - (deductions 1, 2, 4) should be >= employer retirement plan contributions. If not, you could have a real problem on your hands, because normally there is no way to remove excess employer contributions in a 401k.

This is why best practices are to be conservative with employer 401k contributions during the tax year. This allows you to adjust you salary if you do not have sufficient income to support maximum contributions. You have until the tax filing date including extensions to make those contributions. Also, contributions in the following year can be reallocated to that year.

So are you going to have sufficient income for your salary and all deductions including the employer contribution? If not, I'm surprised your CPA didn't say something. Many CPAs don't like to make any employer contributions for an S-Corp until the tax return is done and they know the exact amount possible.

 

[scurry]

Thanks for the very informative response.

My total S corp income was 232K. My employee W2 wage will be 150K. That leaves about 82K (232K- 150K) from which both the employer payroll tax and the 35K for employer retirement contribution have to come, correct? As of now, I have paid approximately 70K via EFTPS for federal payroll taxes and this includes both my employer and employee shares of the taxes, correct? Is it correct to assume that half of that 70K (35K) represents the employee contribution for federal payroll taxes?

If so, then my approximate net income (not including employer retirement plan contribution) would be the following:

232K (total S corp income) - 150K (W2 wages) - 35K (employer's share of federal payroll tax) = 47K; this is > the 35K needed for my employer contribution to the solo 401k.

Is this correct?

 

 

 

 

[csciora]

The IRS uses the phrase 'profit sharing', but it really refers to any arbitrary amount up to $35K issued to the owner/employee. It's not related to the business profitability in any way. If you received $140K in income from the business, it can contribute the full $35K (25%) to the 401K regardless of the impact on net profits.

[scurry]

So, if my S Corp made 232k (prior to any payroll taxes) and my W2 is 150k, I should be ok?