Solo 401K--SS tax

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Solo 401K--SS tax

Postby mikefixac » Tue May 14, 2013 7:40 pm

Got this from the Boglehead wiki on Solo 401K plan:

Employee Salary Deferral Contribution: In 2013, 100% of compensation up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed to an Individual 401(k).


Does that mean social security would not have to be paid if over 50, making and contributing $23000?
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Re: Solo 401K--SS tax

Postby tfb » Tue May 14, 2013 8:26 pm

michaelcross wrote:Does that mean social security would not have to be paid if over 50, making and contributing $23000?

No. The self-employment tax is still owed (both employer and employee parts).
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Re: Solo 401K--SS tax

Postby SGM » Wed May 15, 2013 4:32 am

Employee contributions require fica payments. Employer contributions do not. If your business is profitable enough then you pay yourself a reasonable salary and you calculate how much the employer can contribute if you want to maximize tax deferred space. Employer contribution can be up to 25% of salary. I think last year's total for combined contributions was 54,500. The employee with catchup contributions was 22,500.

Since I am working a few hours a week now, I have lost track of the new maximum, but I think it is 55,000.
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Re: Solo 401K--SS tax

Postby Seabeck » Wed May 15, 2013 4:09 pm

SGM wrote:Employee contributions require fica payments. Employer contributions do not.


SGM, do you have a citation to support not paying fica taxes on the employer contributions? We incorporated for this year and are filing as an S Corp. Initially I was under the impression that employer contributions to our soon-to-be opened solo 401k would be exempt from fica taxes, but I haven't been able to find a citation for this.

I tried getting a straight answer from our cpa and on this forum before as well and left with the impression that we're stuck paying fica taxes on the employer contributions. I'd love to be proven wrong and would be eternally grateful if you have an IRS citation to throw in my hopefully-mistaken CPA's face.

We actually put off opening the solo 401k as sole proprietors because it looked like we were stuck with fica taxes either way and we needed a bigger emergency fund anyways.
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Re: Solo 401K--SS tax

Postby SGM » Wed May 15, 2013 5:18 pm

This article states that employer contributions are not subject to fica taxes. http://www.pbtk.com/newspage.asp?AID=300
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Re: Solo 401K--SS tax

Postby Calm Man » Wed May 15, 2013 6:34 pm

I have done this for a few years. The FICA tax is paid on the business profits. That goes on Schedule C and then to page 1 of the 1040 "above the line". This is what is used for the SE tax calculation. It has nothing to do with self 401K contributions. These are below the line as adjustments to income.
Last edited by Calm Man on Wed May 15, 2013 7:58 pm, edited 1 time in total.
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Re: Solo 401K--SS tax

Postby mah001 » Wed May 15, 2013 6:40 pm

IRC subsection 3121(a) defines wages for FICA purposes. 3121(a)(5) lists exceptions. 3121(a)(5)(A) talks about the exception for a qualified plan.

Note that for a sole proprietor, FICA is paid on both employer and employee contributions made on behalf of the owner. If employer contributions are made for nonowner employees, these are exempt from FICA.
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Re: Solo 401K--SS tax

Postby SGM » Wed May 15, 2013 9:23 pm

I don't know about sole proprietor ownership and I do not fill out a schedule C. For an S corp, the employer contributions are an expense on a 1120s and are not included in the w-2 or 941. The solo 401k I have allows for a profit sharing component. Some plans are simply profit sharing and none of the employer's contribution are subject to fica taxes.

For the article I previously referenced contains the following:

"It is important to remember a few housekeeping items for these individual plans. Employee salary deferrals are subject to FICA tax, so even though the pension rules permit 100 percent salary deferrals, the FICA tax must be paid first with the remaining dollars eligible to be deferred into the plan. Profit sharing contributions, however, are considered to be employer contributions and not subject to FICA tax."

Another advantage of the S corp is that additional profit over salary and profit sharing can avoid fica taxes because it is reported as profit on a K-1. Income tax is then paid by the owner but not fica taxes. This has been addressed elsewhere on this site. The salary paid to an officer of the S corp has to be high enough not to bring on the wrath of the IRS.

Edited for typo.
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