Self employed income- dump all of it into solo 401k or just after deducting expenses

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
mrsytf
Posts: 166
Joined: Sun Aug 14, 2016 9:04 pm

Self employed income- dump all of it into solo 401k or just after deducting expenses

Post by mrsytf » Wed Sep 13, 2017 6:45 pm

Looks like I will "only" be making 16-18k of self employed income this year. I have spent roughly $3000 this year in work related expenses in an effort to generate more work and be more efficient at work. I justified those expenses in part because I expected to make more than the $18k. For a multitude of reasons, it didn't happen this year.

I could just dump my entire earnings into my solo401k and call it a day. Or I could deduct the 3k from the $16-18k and deposit the remainder into the solo401k. Is it six of one and half dozen of another? Or are there some factors I am not considering?.

livesoft
Posts: 55945
Joined: Thu Mar 01, 2007 8:00 pm

Re: Self employed income- dump all of it into solo 401k or just after deducting expenses

Post by livesoft » Wed Sep 13, 2017 6:49 pm

Are you not deducting your expenses on your Schedule C in order to pay 15+% less in FICA/medicare? If so, then use the self-employed income 401(k) calculator to see your limits. Use the calculator anyways.

In other words, I think you have to follow the tax laws and cannot make up your own laws.
Last edited by livesoft on Wed Sep 13, 2017 6:50 pm, edited 1 time in total.
This signature message sponsored by sscritic: Learn to fish.

notmyhand
Posts: 201
Joined: Mon Jul 15, 2013 7:43 pm

Re: Self employed income- dump all of it into solo 401k or just after deducting expenses

Post by notmyhand » Wed Sep 13, 2017 6:50 pm

You still have to pay FICA taxes on solo 401k contributions.

pshonore
Posts: 5576
Joined: Sun Jun 28, 2009 2:21 pm

Re: Self employed income- dump all of it into solo 401k or just after deducting expenses

Post by pshonore » Wed Sep 13, 2017 7:30 pm

You may want to look at this thread viewtopic.php?f=2&t=226835 for reasons on why you should always claim valid business expenses.

mrsytf
Posts: 166
Joined: Sun Aug 14, 2016 9:04 pm

Re: Self employed income- dump all of it into solo 401k or just after deducting expenses

Post by mrsytf » Wed Sep 13, 2017 7:36 pm

You still have to pay FICA taxes on solo 401k contributions.

I didnt realize that. In previous years I had a sep IRA and just contributed the 25% of the net income. There was always net income to pay taxes on. This is the first year with a solo401k and it appears that my potential employee contributions would nearly equal or surpass my net income.

So then in that case it would be better to just go ahead and deduct the expenses because my net income would be lower and hence less taxes to pay? If I make 18k and have 3k in expenses then my net income is 15k. I would pay FICA on the 15k and contribute all $15k into the solo401k correct? I could not contribute $18k.

If I ignored the expenses then I would pay FICA on the $18k but then be able to contribute the entire $18k into the solo 401k.

mrsytf
Posts: 166
Joined: Sun Aug 14, 2016 9:04 pm

Re: Self employed income- dump all of it into solo 401k or just after deducting expenses

Post by mrsytf » Wed Sep 13, 2017 7:37 pm

Pshonore - thanks for the link to the thread. I'll review it.

metrunt
Posts: 143
Joined: Thu Jul 16, 2015 9:36 am

Re: Self employed income- dump all of it into solo 401k or just after deducting expenses

Post by metrunt » Wed Sep 13, 2017 7:46 pm

Good question.

I believe you also get to contribute 25% of compensation direct from your business to your plan as an "employer contribution". I think you get to avoid FICA on that.

I don't know if this is a good idea, but keep that in mind.

avalpert
Posts: 5683
Joined: Sat Mar 22, 2008 4:58 pm

Re: Self employed income- dump all of it into solo 401k or just after deducting expenses

Post by avalpert » Wed Sep 13, 2017 7:55 pm

mrsytf wrote:
Wed Sep 13, 2017 7:36 pm
You still have to pay FICA taxes on solo 401k contributions.

I didnt realize that. In previous years I had a sep IRA and just contributed the 25% of the net income. There was always net income to pay taxes on. This is the first year with a solo401k and it appears that my potential employee contributions would nearly equal or surpass my net income.
You always pay FICA on 401k and SEP IRA contribution (this is true of all 401ks). The amount of your net income that is eligeble for 401k contributions is adjusted for the employer side of Self Employment taxes (as that is presumed to come out of the 'employer' revenue before going to the 'employee' as compensation even though you are both employer and employee).
So then in that case it would be better to just go ahead and deduct the expenses because my net income would be lower and hence less taxes to pay?
You are always better off deducting the expenses - not just because you are not permitted to not deduct legitimate expenses but because you get that money tax free (not pre-tax as with an 401k contribution).
If I make 18k and have 3k in expenses then my net income is 15k. I would pay FICA on the 15k and contribute all $15k into the solo401k correct? I could not contribute $18k.
Assuming you don't have W2 income =>$127,200, the amount you could contribute would be $15k-.0765*$15k=$13,852.50. You could contribute all of that as your employee contribution (again assuming you aren't contributing as an employee at a W2 job).

avalpert
Posts: 5683
Joined: Sat Mar 22, 2008 4:58 pm

Re: Self employed income- dump all of it into solo 401k or just after deducting expenses

Post by avalpert » Wed Sep 13, 2017 8:00 pm

metrunt wrote:
Wed Sep 13, 2017 7:46 pm
Good question.

I believe you also get to contribute 25% of compensation direct from your business to your plan as an "employer contribution". I think you get to avoid FICA on that.

I don't know if this is a good idea, but keep that in mind.
You pay FICA on both and your total contribution limit is your adjusted net income - so if you have less net income than the employee limit you cannot both contribute all of that amount and do an employer match.

Post Reply