Independent contractor solo 401k

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Topic Author
cals400ex
Posts: 181
Joined: Wed Aug 01, 2012 8:38 pm

Independent contractor solo 401k

Post by cals400ex » Wed Jan 25, 2017 9:52 am

I'm 33 years old, single, Illinois resident. I have two jobs. One job I'm an employee (make about $85K gross, but this can vary quite a bit), the second job I'm an independent contractor and I have NO employees (make about 20K gross, but this can vary a lot, too). Job 1 has a 401k with good funds (vanguard and DFA) and has a 1% management fee. I'm wanting to setup a solo 401k for job 2 (with low cost funds and manage it myself). My goal is to fund as much as possible into a tax advantaged account. I also usually do a backdoor roth ira (I usually can't do a regular roth ira due to income limits, but it's close).

1. If I defer 18K at job 1, how much can I contribute tax free to the solo 401k? I've been told it's: 20% (net business profit - 1/2 SE tax), but I've also read on the IRS website that it's: 25% of compensation as defined by the plan. I wasn't sure which...
2. Do I have until April 15th, the following year, to contribute to the solo 401K? Job 1 requires the 401k contributions to come out of the paycheck, but I will not exactly know what my profit is for job 2 until the end of the year.
3. Are all miles to and from work tax deductible for job 2 (I'm a dentist that does work for underprivileged people in assisted living centers/nursing homes at job 2. I drive to several different facilities). I know I can't deduct miles driven to and from work with job 1, but is that possible with job 2?
4. In terms of calculating business expenses, I'm assuming lunches are not tax deductible unless it's specifically work related? I don't have any equipment that I need to buy, that is all supplied to me. I know I can deduct malpractice insurance, dental licenses, continuing education, etc.

Thanks for the help!
Last edited by cals400ex on Wed Jan 25, 2017 10:07 am, edited 1 time in total.

niceguy7376
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Re: Independent contractor solo 401k

Post by niceguy7376 » Wed Jan 25, 2017 10:01 am

cals400ex wrote:I'm 33 years old, single, Illinois resident. I have two jobs. One job I'm an employee (make about $85K gross, but this can vary quite a bit), the second job I'm an independent contractor and I have NO employees (make about 20K gross, but this can vary a lot, too). I also usually do a backdoor roth ira (I usually can't do a regular roth ira due to income limits, but it's close).
As per https://www.irs.gov/retirement-plans/pl ... e-for-2016,
you have a lot of space to do a direct Roth. I am unclear as to why you need to do a backdoor Roth.
cals400ex wrote: 1. If I defer 18K at job 1, how much can I contribute tax free to the solo 401k? I've been told it's: 20% (net business profit - 1/2 SE tax), but I've also read on the IRS website that it's: 25% of compensation as defined by the plan. I wasn't sure which...
How are you setup as independent contractor? Sole Prop or S Corp?
cals400ex wrote: 2. Do I have until April 15th, the following year, to contribute to the solo 401K? Job 1 requires the 401k contributions to come out of the paycheck, but I will not exactly know what my profit is for job 2 until the end of the year.
Since you only can do EmployER contribution as second job, you can do that in the first quarter of next year when you know the exact amount.

Topic Author
cals400ex
Posts: 181
Joined: Wed Aug 01, 2012 8:38 pm

Re: Independent contractor solo 401k

Post by cals400ex » Wed Jan 25, 2017 10:22 am

I want to max out my roth ira, and in previous years I've made ~120k-160k. This year might be lower bc I'm cutting back on hours working. I think the income limit for a single individual to max out a roth ira is 118k, and it starts phasing off from there. Regardless, my income can fluctuate a lot, and if I need to do a back door roth, that's fine. If not, that's fine too.

I haven't signed the contract yet for job 2. I won't be starting that job for a month. I'm assuming it will be a sole proprietor, but I'll check on that.

Lafder
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Re: Independent contractor solo 401k

Post by Lafder » Wed Jan 25, 2017 10:26 am

1. If I defer 18K at job 1, how much can I contribute tax free to the solo 401k? I've been told it's: 20% (net business profit - 1/2 SE tax), but I've also read on the IRS website that it's: 25% of compensation as defined by the plan. I wasn't sure which...

((This is a great question for your accountant. There is the employer and employee portion. If you max your employee portion at job 1, then what you can still contribute is the employer portion at job 2. I do not completely understand it, but my self employment tax is somehow less since my spouse is also making tax payments through their employer. I just take the number my accountant gives me when I give her all of my numbers for my tax return, and max it to that. She gets me the number before 4/15 and I make sure I have made/sent my final solo 401k contribution before I sign my tax return for filing))


2. Do I have until April 15th, the following year, to contribute to the solo 401K? Job 1 requires the 401k contributions to come out of the paycheck, but I will not exactly know what my profit is for job 2 until the end of the year.

((Yes solo401k contributions can be made through the tax filing deadline, so 4/15 or extension. So I always get close but under (I base on the year prior) until my accountant tells me the actual number. Note that a solo401k must be set up in the tax year. So if you have not yet opened one for 2016 it is too late for a solo401k for last year. But it is not too late for a SEP for 2016. Note that if you open a SEP at Fidelity and also set up a solo401k there, you can roll the SEP for 2016 to the solo401k since Fidelity does allow incoming Rollovers to their solo401k.


3. Are all miles to and from work tax deductible for job 2 (I'm a dentist will does work for underprivileged people in assisted living centers/nursing homes. I drive to several different facilities). I know I can't deduct miles driven to and from work with job 1, but is that possible with job 2?

((It sounds to me like it would be since the travel to job #2 is a crucial component and not simply a commute to your office. This seems to be a good description https://www.mileiq.com/blog/mileage-deduction/ But again, run it by your accountant. (I don't call my accountant all the time to ask these questions, but once you get an answer to these questions, the rules rarely change :)) You need to keep an actual log of dates and miles traveled. Keep in mind all of these deductions lower the taxable income you can put away in a SEP or Solo401k so it may or may not be worth keeping track))

4. In terms of calculating business expenses, I'm assuming lunches are not tax deductible unless it's specifically work related? I don't have any equipment that I need to buy, that is all supplied to me. I know I can deduct malpractice insurance, dental licenses, continuing education, etc.

((That sounds correct. Is there some % of your phone usage that is related to this job ? Since you sound like you have 2 practices, I think there might need to be a calculation of % for each job. Such as if your primary job is 80% of your time, then only 20% of CME would be from your other job's expenses. Ask your accountant :) I use my cell for work and personally, the vast majority is work. So I call 90% of my cell phone bill a work expense. I do not track the miles to and from the bank or post office or office supply store. I decided it was too much hassle to be worth it. Plus it is on my way home :))

lafder

Spirit Rider
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Re: Independent contractor solo 401k

Post by Spirit Rider » Wed Jan 25, 2017 1:13 pm

cals400ex wrote:1. If I defer 18K at job 1, how much can I contribute tax free to the solo 401k? I've been told it's: 20% (net business profit - 1/2 SE tax), but I've also read on the IRS website that it's: 25% of compensation as defined by the plan. I wasn't sure which...
They are exactly the same. For a sole proprietor a maximum contribution of 20% (net business profit - 1/2 SE tax) = 25% compensation. For starters net self-employment income = (net business profit - 1/2 SE tax). The reason you calculate a sole proprietor's maximum employer contribution by using the net self-employment income is because the actual employer contribution is not compensation and thus reduces compensation.

For example, the maximum employer contribution with a net self-employment income of $20k * 20% = $4k. Your compensation is then $20K - $4K = $16K. The employer contribution is then $4K / $16K = 25% of compensation. Rather than use a trial and error method, your percentage of net self-employment income can be calculated from the percentage of compensation with a simple formula. Net self-employment income % = compensation % / (1.0 + compensation percentage). 25% / 1.25% = 20%. Or you can just simply look it up in the table in Pub 560.
2. Do I have until April 15th, the following year, to contribute to the solo 401K? Job 1 requires the 401k contributions to come out of the paycheck, but I will not exactly know what my profit is for job 2 until the end of the year.
If you are a self-employed, both the employee deferral (if any) and the employer contribution must be made by your tax filing deadline including extensions.
3. Are all miles to and from work tax deductible for job 2 (I'm a dentist that does work for underprivileged people in assisted living centers/nursing homes at job 2. I drive to several different facilities). I know I can't deduct miles driven to and from work with job 1, but is that possible with job 2?
You can only deduct the miles in excess of your normal commuting miles back and forth to the W-2 job on days you also perform the self-employment services. On days you only perform the self-employment services, you should be able to deduct all the miles. This assumes you can make the case that you are travelling from your business office (in your home) back and forth to the client's premises.
4. In terms of calculating business expenses, I'm assuming lunches are not tax deductible unless it's specifically work related? I don't have any equipment that I need to buy, that is all supplied to me. I know I can deduct malpractice insurance, dental licenses, continuing education, etc.
Your meals are only deductible on trips overnight away from home. However, meals provided by you for clients and or vendors would be deductible (50%).

Any of the business expenses required for both jobs would at least need to be apportioned (probably based on income) between the W-2 job and the self-employment services. Although I wonder if the case could be made that the expenses were mandatory for the W-2 job?

Topic Author
cals400ex
Posts: 181
Joined: Wed Aug 01, 2012 8:38 pm

Re: Independent contractor solo 401k

Post by cals400ex » Wed Jan 25, 2017 2:24 pm

If my net self employment income is $20K and defer 18K to this solo 401k (job 2), I assume my profit sharing would now decrease?

Spirit Rider
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Re: Independent contractor solo 401k

Post by Spirit Rider » Wed Jan 25, 2017 3:03 pm

cals400ex wrote:If my net self employment income is $20K and defer 18K to this solo 401k (job 2), I assume my profit sharing would now decrease?
Here are the limitations on the solo 401k employer contributions.
  1. <= 20% net self-employment income
  2. <= (net self-employment income - employee deferral) / 2
  3. <= Annual limit - 403b (employee deferral + employer contributions) - solo 401k employee deferral
  1. This would be $4K
  2. Solo 401k contributions can not exceed 100% of compensation. You might think this drops it down to $2K ($20K - $18K), but the real answer is $1K, because remeber the $1K employer contribution reduces the compensation to $19K - $18K = $1K
  3. The annual limit is $53K in 2016 and $54K in 2017. Since you do not have a 403b, your employer contribution <= $54K - $18K = $36K
The bottom line is with $20K net self-employment income and $18K employee deferral, your 2017 maximum employer contribution would be $1K.

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serbeer
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Re: Independent contractor solo 401k

Post by serbeer » Wed Jan 25, 2017 3:24 pm

Good article and calculator to answer all your questions
https://thefinancebuff.com/solo-401k-fo ... yment.html

Raabe34
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Re: Independent contractor solo 401k

Post by Raabe34 » Wed Jan 25, 2017 3:42 pm

Not a specific answer to your questions but overall: Are you using a CPA? It doesn't appear so. If not I would highly recommend it and interview one with those questions and if you don't buy the answers move on to the next one. A good CPA will save you more than they cost.

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