Self Employment Contributions to 401K

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Shredmonster
Posts: 1
Joined: Tue Sep 03, 2019 8:08 pm

Self Employment Contributions to 401K

Post by Shredmonster » Tue Oct 29, 2019 9:33 am

I just wanted to run this by you guys here. I think I have this right but not 100% sure.

Self employed. Having a good year. Normally I pay myself $60K a year and keep the rest in the business account.

This year I made enough to max out my 401K contributions up to the limit of $56,000 for 2019 using an employer contribution.

To do this I would put the maximum in as an employee with a catch up contribution totaling $25,000 ($19K + $6K catch up) and an employer contribution for the rest - $31,000.

Now here is the rub. If I were NOT TO max out my 401K and leave my contributions the same as I always do - I could put in the $25K + 25% of my compensation = $60K x .25 = $15,000. So my total contribution for the year = $25K + $15K = $40,000.

IRS rules say an employer can put a maximum contribution of 25% of gross salary. So for me to put in $31,000 I would have to increase my compensation for the year to $124,000.

If I did that I would be paying about 35% on another $64,000 (Current compensation = $60,000 + the extra I would pay myself of $64,000).

35% taxes on $64,000 = $22,400.

Here is how I see this: I would be contributing $16,000 more into my 401K by increasing my salary this year. However I would be paying $22,400 MORE IN TAXES on the income I would pay myself in order to be able to maximize my contributions.

Now normally I can pay myself a certain amount directly out of my business. This amount gets taxed as "dividends" at 18% . I could pay myself $20,000 more out of my business account - 35% tax on this would be $3600. So I would have $16,400 after tax. I could stick this amount into a ROTH IRA.

I think it would be better to go the dividend route.

HomeStretch
Posts: 2900
Joined: Thu Dec 27, 2018 3:06 pm

Re: Self Employment Contributions to 401K

Post by HomeStretch » Fri Nov 01, 2019 7:28 pm

Welcome!

No advice on your choice but wanted to mention that the max you can contribute at age 50+ is $62k. The $6k employee catch-up contribution increases the 401k limit from $56k to $62k.

Spirit Rider
Posts: 11897
Joined: Fri Mar 02, 2007 2:39 pm

Re: Self Employment Contributions to 401K

Post by Spirit Rider » Fri Nov 01, 2019 7:54 pm

You talk about being "self-employed". Are you truly a self-employed or are you an S/C-Corp? You can ONLY have retained earnings in a C-Corp. The reason I raise this is, because it is rare that an individual C-Corp is beneficial.

If you are an S-Corp 2% shareholder employee, it does not matter if you leave the your share of the business profits in the business account. An S-Corp is a pass-thru business. You MUST report your share of the business profits on your K-1. This MUST be reported on your personal tax return and taxed as ordinary income.

If you are self-employed it is also a pass-thru business. It does not matter if you leave business profits in the business account. 100% of your share of business profits are subject to both SE taxes and ordinary income taxes.

If either of the latter two cases are true. This represents tax evasion and you should amend your returns and pay the unpaid taxes and penalties.

I hope you had/have a C-Corp or I am totally misunderstanding your OP. If you are a C-Corp you should use the right teminology and clarify. This is especially true given how rare individual C-Corps are.

fyre4ce
Posts: 359
Joined: Sun Aug 06, 2017 11:29 am

Re: Self Employment Contributions to 401K

Post by fyre4ce » Fri Nov 01, 2019 7:54 pm

Do you have a C or S corporation? Some of the things you're saying seem to imply a non pass-through business.

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