Simple IRA
Hello –
For a law firm set up as an LLC w/ a single member owning 100%, w/ the owner taking draws (other employees receive W-2 wages), I want to confirm that:
1. Such a business may establish a Simple IRA;
2. The owner would be considered ‘self-employed,’ so his compensation would be the net earnings from self employment prior to subtracting any contributions made to the Simple IRA for the owner.
Assume the owner takes a ‘draw’ of $50k, contributes $5k into his Simple IRA and the LLC records neither a profit or loss (so $0 net earnings). Is his net earnings from self employment considered to be $5k [the $0 + $5k deferrals into his Simple IRA] OR $55k [the $50k draw + $5k Simple IRA contribution]? Whichever it is, he would match 3% (assume per participant deferrals, not on a non-elective basis).
Please advise. Thank you!
Jason
Permalink Submitted by William Tuttle on Wed, 2021-09-22 01:29
Yes
See IRS Publication 560, Chapter 3. For a SIMPLE IRA, net earnings from self-employment (earned income) = Schedule SE Line 4 (nominally business profit * 0.9235).
An LLC is considered by the IRS to be a disregard entity. It has no profit or loss.
The draw is irrelevant.
His net earnings from self-employment are also irrelevant in determine the employer match.
The match is a percentage of the actual employee deferral.
However, a special computation of the percentage is required for self-employed individuals. See IRS Publication 560, Chapter 6.
Permalink Submitted by Jason Hochstadt on Wed, 2021-09-22 11:46
Thanks for the reply. Understood – so how does an owner make contributions throughout a given year (e.g. 2021) since the net earnings from self-employment isn’t known for 2021 until the following calendar year? Also, as a result the match can’t be done in the same year either, correct, at least for the owner?Also, the match can either be 3% of compensation, up to the actual deferral, or 2% for every employee on a non-elective basis. At least this is the case for W-2 employees.Thanks. Jason
Permalink Submitted by William Tuttle on Wed, 2021-09-22 13:01
While an employee deferral is limited to 100% of net earnings from self-employment (earned income). An employer match is based on the employee deferral and not earned income.
The employer match is on the employee deferral. The match is 3% for a W-2 employee and 2.9126% for a self-employed individual. See the “Rate Table for Self-Employed” in Chapter 6 of Publication 560.
As long as they stay within the employee deferral limit and self-employed earned income to date. A self-employed individual can make employee deferrals during the year and receive employer matches at that time. For example they could make a $1,000 employee deferral on the 15th of each moth and receive a $29.13 employer match.
A 2% non-elective employer contribution is based on self-employed earned income. However, it is so small the contribution might as well just be made by the tax filing deadline.
Note: At low levels of self-employed earned income, employer contributions are limited to (self-employed earned income – employee deferrals) / 2.