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Setting up a Solo 401K plan with 1099 income

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  • Setting up a Solo 401K plan with 1099 income

    Hello WCI!

    This is my very first post, so please forgive me for my limited financial knowledge! I can promise that I’ve tried my best to sift through previous blog posts for the answer to my questions.

    I have some questions regarding setting up a solo 401k.

    Just a little background - I’m an emergency medicine physician with both 1099 and W2 income. I’ve already maxed out my contributions to a 403b account ($18K) with the hospital that provides my W2 income.

    I would like to take advantage of maxing out my retirement to the $54K limit if possible through a solo 401K. Through my 1099 income, I will make a total of approximately $147K by the end of the year with a net profit of approximately $135K on a 1099 as an independent contractor. This net profit is simply a total income minus business expenses and does not take into account any taxes.

    Here are my questions:
    1) Given these numbers, can I only contribute $135K * 25% = $33750 into my solo 401K? Or can I put in $36K ($147K * 25% = $36750)?
    2) I’m planning on opening a solo 401K with TD Ameritrade because all of my other accounts are with them (roth IRA, traditional IRA, individual brokerage account), and they DO allow me to use my SSN to open up the account. Is there any benefit to me obtaining an EIN and opening up the account with an EIN instead? Is the only benefit of using an EIN is protecting the theft of my SSN on forms?
    3) I have received all of my 1099 income through my social security number and it is deposited straight into my personal bank account. Can I still obtain a new EIN number today and max out the solo 401K even though I obtained all the income through my SSN?

    Thanks in advance for all of your help.

  • #2

    1. Your contribution will be limited to ~20% of your net profits, including a reduction for 1/2 of your Medicare tax.

    2. Whether a custodian allows you to apply with a SSN or requires an EIN should have zero bearing on which one you choose. The fact that you have other accounts there and the custodian meets any other needs should be the affecting factor. In this case, I'd stick with TDA.

    3. This is quite simple. You will "nominee" any income reported under a different ID number than the one you are using for your company. You are then able to reconcile all payments for IRS system matching purposes. I recommend using an EIN for all reporting simply because you want as few eyeballs as possible on your SSN.


    I strongly recommend you use an experienced professional for your tax reporting and advice during the year. If you have W2 only and a few supplementary schedules, no reason not to DIY if you are so inclined. When you add a business, your situation becomes far more complicated and it is pretty easy to miss tax opportunities.

    On an unrelated topic, why do most first-time posters start with an apology? Are we really that judgmental? Sign me happy to help.
    Working to protect good doctors from bad advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      1. i think it depends on what you are taking home as your income but others are more knowledgeable about this. i make 1099 moonlighting but it's much less than you and i have no expenses associated with it. i use 20% x gross as that is what others have recommended.

      2. according to my accountant at Fox (mod/advertiser) if you aren't asked for an EIN you don't need one. i use Fidelity for all my stuff and used my SSN. i have an EIN for my nanny but the CPA said to just use SSN for my solo 401k. i can't imagine how this would ever cause problems with the IRS.

      3. see above, shouldn't be an issue.

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      • #4
         

        The maximum employer contribution is 20% of your net self-employment earnings (net business profit - 1/2 SE tax), not just net business profit. On $135K net business profit from moonlighting income where W-2 SS wages >= $127,200. The SE tax will be $135K * 0.9235 * 0.029 = $3,616. The net self-employment earnings will be $135K - $3,616/2 = $133,192. The maximum employer contribution will be $133,192 * 0.20 = $26,638.

        It might not affect you this year, but it is something you should be aware of, as your moonlighting income increases. A 403b plan is considered controlled by the participant for annual addition (employee + employer contributions) aggregation under 415c. 403b annual additions must be aggregated with the annual additions of > 50% owned businesses. For 2017, your maximum one-participant 401k annual additions can not exceed $54K - $18K - 403b employee deferral - 403b employer contributions. This means your maximum one-participant 401k employer contribution is limited to $36K - any 403b employer contributions.

        There is another question that you didn't ask the question, but I will answer it any way. Many physicians get talked into using an S-Corp for moonlighting income. When almost all of them have W-2 Social Security (SS) wages >= the SS maximum wage base (2017 = $127,200). With this amount of net profit, you will pay substantial more in net FICA than you would in net SE Tax.

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