Calculate Employer Contribution for Solo401K

[shantster]

I am going to open a Solo401K this year to put in some side income that will be paid on a 1099 and am trying to figure out exactly how to calculate the maximum employer contribution. I will be making $8800 from the 1099 income and will make more than the $118,500 maximum for SS taxes on W2 income alone. From what I gather from schedule SE, I will only need to pay a self-employment tax of 2.9% as my SS tax will be deducted from the W2 wages. That leaves my SE tax as $235.68 (2.9% of 8,126.80, which is 92.35% of 8800 - calculations on form SE).

 

When calculating my contribution, which is 25% of net income, would I simply go:

8800 (income) - 117.84 (1/2 SE) = 8682.16 (net income) * 0.25 = $2170.54 (my contribution)

Thank you for any assistance that can be provided.

[DMFA]

20% of net profits, which is income minus expenses minus half self-employment tax. If you had zero expenses, then it's 18.45% of your income (1 - .0765) * 0.2.

25% of your "income" means 20% of what actually ends up going to you. They're still the same proportions of the whole. x/(1+x) = 0.25/1.25 = 0.2.

Also, if you can factor in your expenses ahead of time, you can figure it out that way. Otherwise I'd put away probably 1/6 of what you get paid and add the rest at the end of the year if you have very few expenses.

[shantster]

DMFA wrote:

20% of net profits, which is income minus expenses minus half self-employment tax. If you had zero expenses, then it’s 18.45% of your income (1 – .0765) * 0.2.

25% of your “income” means 20% of what actually ends up going to you. They’re still the same proportions of the whole. x/(1+x) = 0.25/1.25 = 0.2.

Also, if you can factor in your expenses ahead of time, you can figure it out that way. Otherwise I’d put away probably 1/6 of what you get paid and add the rest at the end of the year if you have very few expenses.

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Ah, they make it a little confusing by subtracting out the contribution before calculating the 25%.

If I do not have to pay the SS tax because my W2 income is above the maximum, my SE tax is only 2.9% rather than 15.3%. Wouldn't that make my 1/2 of the SE tax only 1.45%. So that calculation would be (1 - .0145) * 0.2, which is 19.71%. Is that correct?

[spiritrider]

Your most recent calculation is correct. Your net self-employment income = net business profit - 1/2 SE tax. The maximum employer contribution is net self-employment * 0.20.

Warning: While 401k excess employee deferrals are relatively easy to remove, 401k excess employer contributions can not normally be removed and are subject to a 10% excise tax.

You are advised to be very conservative with employer contributions during the tax year and only maximize them after completing your tax return the following year.

Excess contributions in the year following the tax year, but before your tax return is filed can simply be reallocated to that following year.

[ENT Doc]

I'm sure you're still over it, but keep in mind the 2017 SS limit increased for 2017.  I believe it's $127,500 now.

[shantster]

spiritrider wrote:

Your most recent calculation is correct. Your net self-employment income = net business profit – 1/2 SE tax. The maximum employer contribution is net self-employment * 0.20.

Warning: While 401k excess employee deferrals are relatively easy to remove, 401k excess employer contributions can not normally be removed and are subject to a 10% excise tax.

You are advised to be very conservative with employer contributions during the tax year and only maximize them after completing your tax return the following year.

Excess contributions in the year following the tax year, but before your tax return is filed can simply be reallocated to that following year.

Click to expand...

Good point on being conservative with the employer contributions. I did not know the 10% excise tax existed. Thank you.