Multiple jobs - 401K rules

[polishedhobo]

I remember reading the original WCI at the end of my residency a few years back, my mind was blown! The article below by WCI did it again. A wise and wealthier family member attributed about 20-30% of their wealth just to being good with taxes so I am trying to emulate that and it’s never too early to plan for 2021.

Job #1:
I am a k1 partner in a large group. I can contribute up to 58K there including the 19500 employee bit per HR. This income is subject to self-employment taxes.
-> Job #1 401k: k1. $300,000 earned income projected. My plan permits me to do $19,500 as employee with remaining employer contribution to total $58,000. Ultimately I may earn less with all the covid uncertainty so I potentially can max out the 401k here it seems.

Job #2:
w2 at another hospital. They contribute unmatched a certain amount to a 401K as a employer contribution. Annual income $139,000.
-> Job #2 Employer contribution to 401K will be $15,028 which does not require that I make any contributions.

Job #3:
1099 for government contract job. No matching but does have a 401K. Subject to self-employment taxes.
-> Job #3 401k: 1099 earning $79,000. $79,000 * .2 = $15,800.

Total income before any deductions or anything else = $518K

Total 401k = $15800 + $15028 + $58000 = $88,828

Defined benefit through job#1 = $2,500 up to $30,000
Roth IRA backdoor = $6000
Spousal IRA backdoor = $6000
HSA = $3600

Am I missing anything? Is my overall income going to prohibit me from doing some of this stuff (with deductions probably will be a lot less as I will likely purchase a family vehicle for work (> 6000 lbs) to obtain the section 179/168 bonus depreciation) in addition to a mortgage interest, standard stuff I will deduct against w2. My goal with deductions is to get as close to the ˜$326,000 pass through deduction optimization point while it's still around.

Thanks for any and all comments!

[spiritrider]

Job #3:
1099 for government contract job. No matching but does have a 401K. Subject to self-employment taxes.
-> Job #3 401k: 1099 earning $79,000. $79,000 * .2 = $15,800.

!099 contractors are not employees and can not contribute to their client's 401k plan for their employees. You would have to adopt your own one-participant 401k and make employer contributions to it.

Also, you could look into adopting a one-participant 401k that supports the Mega Backdoor. In my opinion Employee Fiduciary is a good choice for the uninitiated. With the 1/2 SE tax deduction the employer contribution is more like ~15,375 (assuming $79K 1099 income with no business expenses), leaving $58,000 - $15,375 = ~$42,625 in employee after-tax contributions rolled over to a Roth IRA or in-plan Roth rolled over to the designated Roth 401k account.

[jfoxcpacfp]

Please be aware that your 6k lb vehicle must be used at least 50% for your 1099 business to qualify for bonus depreciation (unless that rule has been relaxed under temporary COVID regs, which I’m not researching at the moment). You are required to prorate any business deductions that may apply in this situation to all income forms among the receipts related to each revenue source + personal use, Call me skeptical and cold-hearted, but I have doubts that the purchase of a “family” vehicle will be used at least 50% for the lowest source of income, especially when including personal use.

I do hope you are using a CPA experienced in advising:

• Medical professionals, and
• Those who are WCI participants and/or readers, as these doctors tend to have a far higher level of financial acumen than the typical doctor who takes no interest in financial self-education (with sincere respect to the 95%+ of doctors who fall into that group)

As a footnote, I would never recommend spending unnecessary money simply to save taxes.

I supportspiritrider’s endorsement for Employee Fiduciary. We just began using them for our practices and are quite happy. If you are looking for a TPA that is very hands-on and you know nothing (and want to stay out of it), I might change my opinion.

[polishedhobo]

I commute 130 miles each way to 2 jobs a few times a month. So I suspect the car would easily qualify with over 50% use for business.
As for the confusing idea that seems to stifle a few CPAs I know, because I have separate employments as a k1, 1099 and a w2 I would be able to contribute up to 57K per job? That's what the original WCI article seemed to imply. The car was just extraneous stuff I probably should not have included, my main focus is the 401Ks.

thanks!

[jfoxcpacfp]

I commute 130 miles each way to 2 jobs a few times a month. So I suspect the car would easily qualify with over 50% use for business.
As for the confusing idea that seems to stifle a few CPAs I know, because I have separate employments as a k1, 1099 and a w2 I would be able to contribute up to 57K per job? That's what the original WCI article seemed to imply. The car was just extraneous stuff I probably should not have included, my main focus is the 401Ks.

thanks!

Your W2 401k and your solo-k 401k can each receive $57k max for 2020. You may have controlled/affiliated group issues between the K1 and the 1099 work, so I can't go out on a limb and say you can contribute to all 3. And, to be precise, you, the employee, are limited to a max contribution of $19,500 among all 401k/403b plans. Anything beyond that comes from the employer or (in the case of 1099 work) the business owner making profit-sharing contributions that are limited to 20% of (related business profits minus 1/2 FICA tax imposed on those profits). The 20% goes up to 25% of wages if you are paid as an employee (i.e. you have an s-corp).

[polishedhobo]

thanks so much, very helpful info! Thanks Jfox! Point about spending money to save is well taken, I think I misspoke. My wife and I have a growing family and we do not have a family vehicle for roadtrips, etc. So that's where the idea to buy a vehicle that would qualify came from.

my k1 is not related in any control/affiliated sense with the 1099 but that does seem to be an issue a lot of physicians and dentists could run into.

my k1 company allows 57K total but 19,500 has to be employee contribution. the w2 the employer makes unmatched contributions. the 1099 as the employer I could contribute up to 20% of the income is my understanding. Mostly this is for 2021 planning as 2020 was when I added the 1099 and w2 positions.

[ChicSkiier]

!099 contractors are not employees and can not contribute to their client's 401k plan for their employees. You would have to adopt your own one-participant 401k and make employer contributions to it.

Also, you could look into adopting a one-participant 401k that supports the Mega Backdoor. In my opinion Employee Fiduciary is a good choice for the uninitiated. With the 1/2 SE tax deduction the employer contribution is more like ~15,375 (assuming $79K 1099 income with no business expenses), leaving $58,000 - $15,375 = ~$42,625 in employee after-tax contributions rolled over to a Roth IRA or in-plan Roth rolled over to the designated Roth 401k account.

Thanks for the detailed explanation. Just wanted to give my experience with Employee Fiduciary so far. Last year I opened a solo401K plan through Employee Fiduciary and recently asked how much to contribute as employer based on last year's 1099 net profits and my contact couldn't tell me (misinformed me of doing an "employee" contribution even though I told her I maxed out my employee contribution with another job) and am still waiting for past 2 wks to hear back from her after she was going to discuss with her supervisor. I am setting $ aside for employer contribution and will just figure out the after-tax contribution based on your equation above.

[spiritrider]

Calculating one-participant 401k contribution limits is the plan sponsor's (your) responsibility and not the TPA. There are innumerable posts on here on how to calculate one-participant 401k contributions.

PLan sponsors should always use The Finance Buff's contribution calculation spreadsheet. If they are making employee after-tax contributions or (make and/or receive) 403b annual additions.

The former because you need to realize, the above example simple calculation assumes that net earnings from self-employment (self-employed earned income) are >= (the annual limit / 80%). For 2020 this is $57K / 80% = $71,250.

If your 2020 self-employed earned income is < $71,250, there is an additional limitation on employee after-tax contributions

[notanotherusername]

I have used the finance buff's calculator but as a double check before making my 2020 solo 401k contributions but I was hoping someone could double check. Primarily concerned that I have made a data entry error more than the calculator would be off, although I do have 1 question related to the SE tax (see below).

Earned > social security wage base on w2 job
Employee contribution to w2 401k of 26K (am 50+)
Profit from sole proprietor 1099 income: $29,774
Net earnings from self employment: 29744 x 0.9235 = 27,469
SE tax: 27,469 x 0.029 = 797
1/2 SE tax: 398.5 = 399 rounded off
Max profit sharing contribution: (29774 - 399) * 0.2 = $5,875


Mega BDR (my 401k allows this); maximum after-tax contribution: Employee After-tax Contribution: 100% of net adjusted business profits. Your maximum after-tax contributions are limited to the $57K/$58K limit - employee deferrals - employer contributions and are additionally limited to business profit - 1/2 SE tax - employee deferrals - (employer contributions * 2). I have seen this posted on a few websites but does anyone have the source where this calculation comes from?

29,774 - 399 - (5,875 * 2) = $17,625


Additionally, does anybody see any errors above?

Question regarding SE tax. In asking several people on how to calculate above, 1 has stated that the SE tax should include social security tax as well, even though the social security wage base has been exceeded on the w2 job. The reasoning behind this statement was as follows: "The contribution limit is based on the self-employment tax that would be payable without regard to the self-employment tax that you in fact paid which is lower because you had a w2 job. Otherwise, self-employed persons with w-2 jobs will be treated more favorably than self-employed persons without w-2 jobs and it's unlikely that the regulators would reach a conclusion that results in that disparate treatment".

I believe this to be incorrect. Any comments?

Thank you for any input

[spiritrider]

Answering your last question first. Who ever said you must include the SS taxes, doesn't have the slightest clue.

See the Deduction Worksheet for Self-Employed in IRS Publication 560, step 2.

• Enter your deduction for self-employment tax from Schedule 1 (Form 1040 or1040-SR), line 14
  • Deductible part of self-employment tax. Attach Schedule SE.

Only the actual 1/2 SE tax calculated on Schedule SE and deducted on Form 1040 Schedule 1 Line 14 is subtracted from your business profit Form 1040 Schedule 1 Line 3.

You will not find the formula for maximum employee after-tax contributions in IRS Publication 560 or any other guidance. However, they are inferred from basic rules.

• Your maximum (employee + employer contributions) are the lessor of two annual addition limits.
  • Statutory (2020 = $57K, 2021 = $58K).
  • 100% of compensation.

From IRS Publication 560: Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items.

• The deduction for the deductible part of your self-employment tax.
• The deduction for contributions on your behalf to the plan.

The employer contribution itself is not compensation. Therefore, employer contributions reduce both the annual addition compensation limit and the remaining annual addition space. This is why even though the maximum employer contribution is 25% of compensation, self-employed individuals calculate it as 20% of (business profit - 1/2 SE tax).

Maximum employee after-tax contributions = business profit - 1/2 SE tax - employee deferrals - (employer contributions - employer contributions)(employer contributions * 2).

NOTE: If you are eligible for the QBI deduction. The employer contribution reduces your Qualified Business Income and thus the deduction. Also, the employer contribution reduces your total contributions. You may want to consider only making employee after-tax contributions.

[notanotherusername]

Answering your last question first. Who ever said you must include the SS taxes, doesn't have the slightest clue.

See the Deduction Worksheet for Self-Employed in IRS Publication 560, step 2.

• Enter your deduction for self-employment tax from Schedule 1 (Form 1040 or1040-SR), line 14
  • Deductible part of self-employment tax. Attach Schedule SE.

Only the actual 1/2 SE tax calculated on Schedule SE and deducted on Form 1040 Schedule 1 Line 14 is subtracted from your business profit Form 1040 Schedule 1 Line 3.

You will not find the formula for maximum employee after-tax contributions in IRS Publication 560 or any other guidance. However, they are inferred from basic rules.

• Your maximum (employee + employer contributions) are the lessor of two annual addition limits.
  • Statutory (2020 = $57K, 2021 = $58K).
  • 100% of compensation.

From IRS Publication 560: Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items.

• The deduction for the deductible part of your self-employment tax.
• The deduction for contributions on your behalf to the plan.

The employer contribution itself is not compensation. Therefore, employer contributions reduce both the annual addition compensation limit and the remaining annual addition space. This is why even though the maximum employer contribution is 25% of compensation, self-employed individuals calculate it as 20% of (business profit - 1/2 SE tax).

Maximum employee after-tax contributions = business profit - 1/2 SE tax - employee deferrals - (employer contributions - employer contributions)(employer contributions * 2).

NOTE: If you are eligible for the QBI deduction. The employer contribution reduces your Qualified Business Income and thus the deduction. Also, the employer contribution reduces your total contributions. You may want to consider only making employee after-tax contributions.

Thank you for your insight, as always.
I am not eligible for the QBI deduction so will proceed with $5,875 pre-tax and $17,625 after-tax contributions unless anyone catches an error.

[spiritrider]

I do not see any error in your calculations.

[notanotherusername]

I do not see any error in your calculations.

Thank you!

[notanotherusername]

spiritrider 1 last question: how is the pre-tax contribution documented for my 1040? Do I just give the figure to my accountant or is there an IRS form? Again, I am a sole proprietor related to this 1099 income. Thank you.

[spiritrider]

It just goes on Form 1040 Schedule 1 Line 15