Solo 401K--SS tax

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Solo 401K--SS tax

Postby mikefixac » Tue May 14, 2013 6:40 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?
mikefixac
 
Posts: 61
Joined: Tue Mar 26, 2013 2:00 pm

Re: Solo 401K--SS tax

Postby tfb » Tue May 14, 2013 7:26 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).
Harry Sit, taking a break from the forums.
User avatar
tfb
 
Posts: 6960
Joined: Mon Feb 19, 2007 5:46 pm

Re: Solo 401K--SS tax

Postby SGM » Wed May 15, 2013 3:32 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.
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain
SGM
 
Posts: 1187
Joined: Wed Mar 23, 2011 4:46 am

Re: Solo 401K--SS tax

Postby Seabeck » Wed May 15, 2013 3:09 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.
Seabeck
 
Posts: 37
Joined: Fri Feb 27, 2009 2:29 pm
Location: Washington

Re: Solo 401K--SS tax

Postby SGM » Wed May 15, 2013 4:18 pm

This article states that employer contributions are not subject to fica taxes. http://www.pbtk.com/newspage.asp?AID=300
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain
SGM
 
Posts: 1187
Joined: Wed Mar 23, 2011 4:46 am

Re: Solo 401K--SS tax

Postby Calm Man » Wed May 15, 2013 5:34 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 6:58 pm, edited 1 time in total.
Calm Man
 
Posts: 2917
Joined: Wed Sep 19, 2012 9:35 am

Re: Solo 401K--SS tax

Postby mah001 » Wed May 15, 2013 5:40 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.
mah001
 
Posts: 301
Joined: Fri Sep 28, 2012 9:30 am

Re: Solo 401K--SS tax

Postby SGM » Wed May 15, 2013 8:23 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.
Now I will bug out of the conversation.
"Let us endeavor, so to live, that when we die, even the undertaker will be sorry." Mark Twain
SGM
 
Posts: 1187
Joined: Wed Mar 23, 2011 4:46 am

Re: Solo 401K--SS tax

Postby WriterGen » Sun Feb 22, 2015 5:14 pm

I'm totally resurrecting an old thread--sorry--but I had the same question and found this on a search, along with the answer later.

You don't save money this way as a S-Corp because as an S-Corp, you are technically paying profit-sharing in addition to a salary. So the profit-sharing part has no FICA due, but your salary is higher by the same amount as the profit-sharing portion. Errr.... To explain better....

$100k salary....

As a sole proprietor, you pay $18k individual and $25k employer into the 401-k and owe $15,200 in FICA. (Obvious.)

As an S-Corp, you pay $18k individual. Because the $100k is your salary, you still have to pay $15,200 in FICA, split between employee and employer. Then you can add $25k FICA-free to the account as the S-Corp.

So it works out the same.

That $25k extra decreases whatever other profit-sharing you might have given yourself from the S-Corp by that amount. So only do an S-Corp if you're going to have quite a bit more that you want to avoid FICA on than whatever you want to put into your solo 401-k as the S-Corp. :P

S-Corps are also good for giving shares to family for tax-savings that way, by giving them money to be taxed at their lower income levels. This is REALLY limited in utility for dependent kids, though, because you can only give them $2,000 each a year before you have to pay full income tax on it, anyway. But you can share with adult kids without the penalty.
WriterGen
 
Posts: 19
Joined: Tue Oct 21, 2014 3:31 pm

Re: Solo 401K--SS tax

Postby Spirit Rider » Sun Feb 22, 2015 7:51 pm

WriterGen wrote:$100k salary....

As a sole proprietor, you pay $18k individual and $25k employer into the 401-k and owe $15,200 in FICA. (Obvious.)

As an S-Corp, you pay $18k individual. Because the $100k is your salary, you still have to pay $15,200 in FICA, split between employee and employer. Then you can add $25k FICA-free to the account as the S-Corp.

So it works out the same.

Your example is mistaken for several reasons. First, a sole proprietorship does not have a salary. It has a self-employment income. Second, a sole proprietorship can only contribute 20% of its self-employment income. Third, an S-Corp's profit sharing comes out of what is left over after the W2 salary is paid. etc... Rephrasing your $100K as net business profit for both sole proprietorship and S-Corp.

Sole Proprietorship
Self Employment tax = $100,000 * 0.9235 * 0.153 = $14,130
Self-employment income = $100,000 - ($14,130/2) = $92,935
Profit sharing = $92,935 * 0.20 = $18,587

Maximum Solo 401k contribution $18,000 + $18587 = $36,587, SE Tax = $14,130

S-Corp
Salary = $74,348
Employee FICA $74,348 * 0.765 = $5,688
Employer FICA $74,348 * 0.765 = $5,688
Profit Sharing = $74,348 * 0.25 = $18,587
Distribution $100,000 - $74,348 - $5,688 - $18,587 = $1,377

Maximum Solo 401k contribution* $18,000 + $18587 = $36,587, Employee FICA + Employer FICA = 11,376

* Technically you could increase the S-Corp W2 wages by a portion of the distribution, to allow an increase in the profit sharing. I left it the same as the sole proprietor to show the employer FICA savings on the employer profit sharing.
Spirit Rider
 
Posts: 1804
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401K--SS tax

Postby ralph124cf » Sun Feb 22, 2015 10:00 pm

If your S Corp has a defined benefit plan (expensive in setup and ongoing accounting fees) you can avoid any FICA taxes, employer or employee, on the amount contributed for the employee. This works best for a single employee owned S corp. In some cases, it is allowable to contribute the entire years profit to the defined benefit plan, but this may be risky from an audit standpoint. You must consult with your plan actuary each year to determine the optimum tax strategy.

Ralph
ralph124cf
 
Posts: 660
Joined: Tue Apr 01, 2014 11:41 am


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: 68ShelbyGT500KR, Baidu [Spider], Exabot [Bot], neobavesten, zoombrowser and 29 guests