Permalink Submitted by BruceM on Sun, 2008-07-06 01:18
Alan
While on the subject of Solo-401(k)’s…
…how are these funded for one who is organized as an S-Corp?
Example: one’s S-Corp has net earnings of $100,000 and the single employee has wages of $40,000 and is under 50. Is the maximum contribution for 2008 $15,500 plus…
Permalink Submitted by Bruce Steiner on Sun, 2008-07-06 15:15
The 20%/25% concept is intended to put self-employed in the same position as employees. For example (ignoring social security and Medicare taxes), if your business is in the form of a corporation, and you earn $100,000, the corporation can use the $100,000 to pay you a salary of $80,000 and to contribute 25% of your salary, or $20,000, to a retirement plan.
If you’re self-employed, you (not your business) is making the contribution to the retirement plan. To put you in the same position as if you were operating in corporate form, your contribution is 25% of your earnings net of the contribution (25% of $80,000, or $20,000), which is the same as 20% of your earnings before the contribution (20% of $100,000, or $20,000).
There are also some adjustments made with respect to social security and Medicare taxes, again to put you in the same position as if you were operating in corporate form.
The advantage of being self-employed is that if you retain some of your earnings in the business, this amount will count as self-employment income, but will not count as salary if you are using the corporate form. Of course, there are other factors to consider in the choice of entity, and one should consult with counsel in determining the choice of entity.
Permalink Submitted by BruceM on Sun, 2008-07-06 17:45
Bruce
Thanks for the clarification on how the 20% max self employed self-contribution is calculated. I’ve always explained it using simultaneous equations….your way is easier 🙂
But I’m still confused on one issue…and this seems to be unique to S-Corp Single Employer. For a corporation, the maximum contribution to a QRP is 25% of payroll…not net income. And this is payroll not reduced by employee 402(g) salary deferral. So in my example, I reason that this should be a maximum contribution of .25 X $40,000. I can’t see how the S-Corp’s $100,000 K-1 net income fits into this, as this is not subject to FICA tax and I believe is considered passed-through dividend income….as opposed to a sole proprietor’s Sched C net income, which is considered earned income subject to FICA.
Permalink Submitted by Bruce Steiner on Sun, 2008-07-06 17:57
That’s one of the differences between an S corporation and self-employment. The S income (assuming a reasonable salary) is not subject to social security or Medicare tax, and is not counted for retirement plan contributions and benefits.
Permalink Submitted by Denise Appleby on Sun, 2008-07-06 20:51
I think for plan contribution purposes it’s a little different? … I may be wrong but , but from what I understand- for a corporation, including an S-Corporation, contributions can only be based on W-2 wages received from the company. If you ( the business owner) pays yourself W-2 wages of $40,000, your maximum contribution is as follows:
$15,500 salary deferral ( plus an additional $5,000 if you are at least age 50 by the end of the year)
[u]$10,000 [/u] (25% of $40,000)
[b]$25,500 total[/b](( plus an additional $5,000 if you are at least age 50 by the end of the year)
Contributions for employees and the business owner are deducted on IRS Form 1120S. As opposed to a Partnership where contributions for employees are deducted on IRS Form 1065 and contributions for the business owners are deducted on IRS Form 1040.
Permalink Submitted by BruceM on Sun, 2008-07-06 01:18
Alan
While on the subject of Solo-401(k)’s…
…how are these funded for one who is organized as an S-Corp?
Example: one’s S-Corp has net earnings of $100,000 and the single employee has wages of $40,000 and is under 50. Is the maximum contribution for 2008 $15,500 plus…
25% of $40,000 or
20% of ($40,000 – 1/2 SE tax) ?
BruceM
Permalink Submitted by Alan Spross on Sun, 2008-07-06 03:10
This is not my strong suit at all, but I believe it is 25% of gross salary before deductions, ie. 10,000 in your example.
And 10,000 plus 15,500 is less than 46,000 (Sec 415(c)(1)(a) limit).
Permalink Submitted by Bruce Steiner on Sun, 2008-07-06 15:15
The 20%/25% concept is intended to put self-employed in the same position as employees. For example (ignoring social security and Medicare taxes), if your business is in the form of a corporation, and you earn $100,000, the corporation can use the $100,000 to pay you a salary of $80,000 and to contribute 25% of your salary, or $20,000, to a retirement plan.
If you’re self-employed, you (not your business) is making the contribution to the retirement plan. To put you in the same position as if you were operating in corporate form, your contribution is 25% of your earnings net of the contribution (25% of $80,000, or $20,000), which is the same as 20% of your earnings before the contribution (20% of $100,000, or $20,000).
There are also some adjustments made with respect to social security and Medicare taxes, again to put you in the same position as if you were operating in corporate form.
The advantage of being self-employed is that if you retain some of your earnings in the business, this amount will count as self-employment income, but will not count as salary if you are using the corporate form. Of course, there are other factors to consider in the choice of entity, and one should consult with counsel in determining the choice of entity.
Permalink Submitted by BruceM on Sun, 2008-07-06 17:45
Bruce
Thanks for the clarification on how the 20% max self employed self-contribution is calculated. I’ve always explained it using simultaneous equations….your way is easier 🙂
But I’m still confused on one issue…and this seems to be unique to S-Corp Single Employer. For a corporation, the maximum contribution to a QRP is 25% of payroll…not net income. And this is payroll not reduced by employee 402(g) salary deferral. So in my example, I reason that this should be a maximum contribution of .25 X $40,000. I can’t see how the S-Corp’s $100,000 K-1 net income fits into this, as this is not subject to FICA tax and I believe is considered passed-through dividend income….as opposed to a sole proprietor’s Sched C net income, which is considered earned income subject to FICA.
Would you agree?
BruceM
Permalink Submitted by Bruce Steiner on Sun, 2008-07-06 17:57
That’s one of the differences between an S corporation and self-employment. The S income (assuming a reasonable salary) is not subject to social security or Medicare tax, and is not counted for retirement plan contributions and benefits.
Permalink Submitted by Denise Appleby on Sun, 2008-07-06 20:51
I think for plan contribution purposes it’s a little different? … I may be wrong but , but from what I understand- for a corporation, including an S-Corporation, contributions can only be based on W-2 wages received from the company. If you ( the business owner) pays yourself W-2 wages of $40,000, your maximum contribution is as follows:
$15,500 salary deferral ( plus an additional $5,000 if you are at least age 50 by the end of the year)
[u]$10,000 [/u] (25% of $40,000)
[b]$25,500 total[/b](( plus an additional $5,000 if you are at least age 50 by the end of the year)
Contributions for employees and the business owner are deducted on IRS Form 1120S. As opposed to a Partnership where contributions for employees are deducted on IRS Form 1065 and contributions for the business owners are deducted on IRS Form 1040.