SEP IRA and a side hustle

Submitted by Robert Beane on Wed, 2019-07-31 18:45

W-2 employee earnings of $180,000 with no retirement plan also has a side hustle (Schedule C earnings) of $15,000. When setting up the SEP IRA, what is the limit for contributions (in other words, can the W-2 earnings be included in the computation for the limit)?



Submitted by David Mertz on Wed, 2019-07-31 19:51

The only thing that the $180,000 of W-2 income affects is the amount of self-employment taxes on the $15,000 of self-employment income, because the Social Security wage base is maxed out with the W-2 income.  By maxing out the Social Security wage base with the W-2 income, self-employment tax is lower than what it would be without the W-2 income, resulting in slightly higher net earnings from self-employment to multiply by 20% to get the maximum permissible SEP contribution.  Otherwise the W-2 income has no effect on the maximum permissible SEP contribution.  The maximum permissible SEP contribution in this case would be $2,960.

Submitted by Robert Beane on Wed, 2019-07-31 20:33

thank you

Submitted by William Tuttle on Wed, 2019-07-31 23:50

  • As pointed out by DMx, your maximum SEP IRA employer contribution would be limited to 20% of your self-employed earned income (business profit – 1/2 SE tax).
  • With no employer retirement plan at your W-2 employer, you could make an employee elective contribution to a one-participant 401k of 100% of your self-employed earned income not to exceed the limit (2019 = $19K).
  • If you generate higher self-employed earned income you could also make the same 20% employer contribution to a one-participant 401k as an SEP IRA. However, the employer contribution is limited to the lesser of the annual addition limit (2019 = $56K – your employee elective contribution) or (your self-employed earned income – your employee elective contribution) / 2.

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