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What should my minimum W2 compensation be in order to max out my i401K for 2020

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  • What should my minimum W2 compensation be in order to max out my i401K for 2020

    For 2020, as an S corp 100% shareholder employee, I believe my max i401K employer contribution will be 37.5K and my max employee contribution will be 19.5K (total 57K). I need to determine the minimum my S Corp should be paying me in the form of a W2 in order to have the max employer contribution of 37.5K in my i401K.

    Should my W2 compensation be:

    37.5/0.25 = 150K

    for 2020?

  • #2
    yes

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    • #3
      Can you please explain the 0.25. I have always wondered how one arrives at the w2 compensation amount? thanks

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      • #4
        employer contribution is limited to 25% of compensation

        pretty sure for S Corp, compensation is W2 Box 1 but don’t take that as gospel

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        • #5
          and important to remember that if you have insurance through S Corp then medical premiums and HSA contribution are included in W2 Box 1 compensation

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          • #6
            Originally posted by jacoavlu View Post
            employer contribution is limited to 25% of compensation
            I keep reading some people say 20% and some say 25%. Are they different plans or a different calculation?

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            • #7
              25% of compensation
              20% of net self employment earnings

              same number

              for a sole prop it’s simpler to use the 20% calculation because employer contributions reduce compensation

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              • #8
                Originally posted by jacoavlu View Post
                25% of compensation
                20% of net self employment earnings

                same number

                for a sole prop it’s simpler to use the 20% calculation because employer contributions reduce compensation
                Is this "approximately" 20% or is it actually 20%? In my employed job I already pay max SS tax, so I was planning only to subtract out the Medicare taxes from the net earnings. That would come out to a bit higher than 20% (25-1.45%-employer contribution=22%). Just wanted to clarify or am I missing something? Thanks.

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                • #9
                  it’s actually 20%

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                  • #10
                    The 1/2 SE tax reduces the amount of self-employed earned income available for the 20% maximum contribution. It does not effect the maximum contribution percentage.

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                    • #11
                      Originally posted by ananas View Post

                      I keep reading some people say 20% and some say 25%. Are they different plans or a different calculation?
                      They are the same number. 25% including contribution. 20% not including the contribution.

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                      • #12
                        Got it, thank you

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                        • #13
                          jacoavlu Hey, check this out. Paychex only paid me $36,674.60 for QTR 4 even though I asked them to pay me $37,500 per QTR. Does this look right to you? Do you see any another issues?
                          Attached Files

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                          • #14
                            This was my payroll lady's explanation for the lower 4th quarter income:

                            "The representative prior to me had it noted that you wanted a net of $22,944.88. Contributing 3986.23 to fed and 1630.51 to state. So with that net and those contributing taxes, medicare, disability, and social security are set percentages we can't change. You reached your max for contributing to social security which reduced your gross since we re working backwards from Net to go Gross. So this reduced your gross. you still maxed out of 401k and got your same net and contributing fed a dns state per the notes."

                            Does this make sense? I had significantly increased the amount of my W-2 to allow me to makes out my solo 401K. I'm confused why she didn't increase the taxes withheld. Would appreciate it if anyone can tell me what I need to do from here.

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                            • #15
                              Don't ask me why, but it appears your 4th quarter wages were adjusted to result in the same net pay as the 1st three quarters. You should have just had a higher net pay after the SS MTE (2020 = $137,700) was reached.

                              Also, there is no 4th quarter employer contribution listed.

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