Simple IRA contribution for self employed
Single person 30 yrs old in 2022 income received reported to his LLC for $140,000 less $30,000
in business deductions (before items considered below) therefore taxable income $110,000 before possible
deductions considered below.
1. Can this person contribute 20% to a SIMPLE IRA or $22,000 and also $6,000 to a regular
deductible traditional IRA in 2022
2. If item 1 incorrect above, what is the maximum he could contribute
Permalink Submitted by William Tuttle on Mon, 2022-04-11 14:03
Maximum SIMPLE IRA Contributions
Employee deferral election required by 12/31/21
Maximum employee deferral limit, 2021 = $13,500
Maximum employer contribution
Employer match up to 3% of compensation, or
Employer non-elective contribution of 2% of compensation
Self-employed earned income (net earnings from self-employment) = Schedule SE Line 4, generally business profit * 92.35%
For a self-employed individual, the employer contribution itself reduces compensation. Therefore it is calculated as self-employed earned income * reduced rates
2% = 2% / 102% = 1.9608%
3% = 3% / 103% = 2.9126%
25% = 25% / 125% = 20%
Maximum SEP IRA contributions
SEP IRA self-employed earned income (net earnings from self-employment) = business profit – 1/2 SE tax
Maximum employer contributions = 25% of compensation
It is calculated as self-employed earned income * 20%
At a minimum Schedule C/SE should be completed and refer to Publication 560 to calculate maximum contributions. It is far better to verify or calculate with tax software.
Permalink Submitted by alberto vega on Mon, 2022-04-11 20:41
Thank you for your comprehensive explanation. But I am confused. Both questions relate to the 2022 tax year. I thought the SIMPLE IRA for this self-employed person with no employees, can be your 3rd choice ie 25%= 25%/125% = 20%. Therefore ignoring the effect of self employed ss/mediare tax as you correctly stated busniess profit *92.35%. Then it would be $110,000 x 20% or $22,000?Client does not want to do a SEP IRA. Since apparently the SIMPLE IRA would give him the same deduction/contribution as a SEP IRA, except if the answer to the question below is in the negative.The other question is : if he does the SIMPLE IRA can he also contribute $6,000 to a tradiitional deductible IRA in 2022?
Permalink Submitted by David Mertz on Tue, 2022-04-12 12:19
As spiritrider said, the maximum employer contribution SIMPLE IRA is either matching contribution of up to 3% of compensation or a nonelective contribution equal to 2% of compensation, not 25% of compensation (using the special calculation for a self-employed individual).
Permalink Submitted by alberto vega on Tue, 2022-04-12 17:32
I mixed incorrectly the benerfits of SIMPL:E and SEP IRA. To clarifyThe SIMPLE IRA correct benefit is that the employee contribution is 3% of self employed income. In my example $110,00 x 3% = $3300 as the “employer contributiion” plus $ 13,500 as the self employed employee contribution for a total of $16,800. Not reflecting the adjustments to the net income for 1/2 of ss and medicare tax on the net income.But my other question is, if the person does the above, can that person also contribute and deduct $6,000 to a deductible traditional IRA?
Permalink Submitted by William Tuttle on Wed, 2022-04-13 19:33
Any SIMPLE IRA contributions make you an active participant. You and possibly a spouse will be subject to the applicable traditional IRA deduction limit.