Discussion:Solo 401(k) treatment..need help
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Discussion Forum Index --> Tax Questions --> Solo 401(k) treatment..need help
| 13 April 2006 | |
| I have a real estate agent for a client. He is set up as an LLC and taxed as a sole proprietor. Recently, he opened a solo 401(k). I need to figure out what his contributions ( EE and ER) should be AND what the tax effect of these contributions will be.
So... assumptions: 2006: LLC Net income (before taking any wages) : $115,000 ER contribution : max. limit of $15,000 (per IRC 402(g)) EE contribution - my understand is this can be a max. of 25% of wages. If this is the case, wouldn't you want to make one large payroll check right before year-end and contribute the maximum (assuming he can live without that cash)? In this situation, $115k x 25% = $28,750 ER contribution. Are these ER contributions subject to FICA? Do wages have to be paid or can this be based on the net income of the sole proprietor? Any advice is highly appreciated. | |
Mtmckeecpa (talk|edits) said: | 13 April 2006 |
| S,
1) If your client is a Sch C, LLC, she does not pay herself a W-2 wage. The starting point for the contribution is net profit from self employment...see below. 2) One-person 401(k) Plans for Self-employed Individuals. Although up to 25% can be deducted for profit-sharing plan contributions, a self-employed individual’s earned income is determined after the deduction for half of the SE tax and reduction for the self-employed individual’s deductible plan contribution [IRC Secs. 401(c)(2)(A) and 404(a)(8)(B) and (D)]. In effect, the maximum 25% is limited to 20% for self-employed individuals. | |
| 13 April 2006 | |
| But that's after the 401k contribution of 15k for last year...
Use good software, so that you can figure the 401k amount and then check the box for the max amount for the rest. | |
| 14 April 2006 | |
| This year there is a cap of $42K on the combined contributions (employer and employee), so check what the cap will be for 2006. What I did for folks this year is max out the employee deferred comp ($14K or $18K depending on age) then took the .25 (effectively .20) employer contrib up to the cap. | |
| 14 April 2006 | |
| For 2006, the profit sharing contribution would be $21,797 and the elective deferral will be $15,000 ($20,000 if over age 50). | |
| 17 April 2006 | |
| Do you recommend any specific software that will calculate the maximum contribution? | |
| 17 April 2006 | |
| Also, do you pay SE tax on the employee's deferred comp (the$15k in '06)? Thanks | |
| 17 April 2006 | |
| SE tax is paid on the net income on Sch C.
I would recommend Intuit's ProSeries Professional. It will calculate the maximum contribution for SEP, Keogh, IRA, and Roth IRA contributions. | |
| 2 April 2007 | |
| I don't know that Sfrey got a good answer to the SE question. My gut feeling is that it's treated like a SEP in a Sched. C. The major negative is that you cannot have an employee in the Sched. C. company, just the owner, and I think owner's spouse. But....my understanding is that you can take loans from this in certain circumstances, and I know it's ERISA covered, so great for asset protection. Anybody had one of these yet? Sounds almost too good to be true.
P.S. Note to Keven, I gasp did a search! | |
| 2 April 2007 | |
| I am assuming that an employee in a corp., for example, takes the 401(k) contribution pretax, but subject to FICA? Is that right? | |
