Solo 401(k) Questions (and sanity check)

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ChapMan
Posts: 146
Joined: Wed Nov 24, 2010 8:53 pm

Solo 401(k) Questions (and sanity check)

Post by ChapMan » Sat Sep 08, 2018 9:13 pm

Hello Everyone,

I'm thinking of starting a solo 401(k) to stash some cash from a consulting job I landed a few months back. I'm posting here for a sanity check to make sure I understand the concept/limits of a solo 401(k).

ASSUMPTIONS:
Gross income from consulting - $30,000
TSP/401(k) employee deductions from day job - maxed out
Gross MFJ income - ~$235,000 (including the $30,000 above)
Deductions - probably the standard deduction
Business expense deductions - Not sure yet, possibly ~$2,000 or so
Total income minus 7.65% employer contribution of self-employment taxes - $27,705
Consultant job - not eligible for 199A deduction (I think this is accurate)
No employees
Under 50 years old

QUESTIONS

1. I understand that in my situation, I am eligible to contribute, as an employer contribution, 20% of net business profit (I think that's the right term?). I believe that I can no longer make any employee contribution since I have already maxed out the $18,500 for the year (no employer match there, so we're not in danger of hitting the maximum $55,000 limit). In this case, it will be $30,000 - (7.65% of $30,000) = 27,705; 20% of 27,705 = $5,541. Is that accurate? What if I have business expense deductions? Does that come off the $27,705? For instance, if I have $2,705 of business expenses, does that mean that maximum I can contribute is 20% of $25,000 (0.2 * $25,000 = $5,000)?

2. I believe that the employer contribution is deductible, assuming I do not do a Roth solo 401(k), so at the end of the tax year I'll owe income taxes on gross revenues - 1/2 of self-employment tax - business deductions - solo 401(k) contributions. So, in the case above, assuming I had business expense deductions worth $2,705, I would owe income taxes based on the following formula: $30,000 - $2,295 - $2,705 - $5,000 = $20,000. It that accurate?

3. I do not believe that this affect my ability to engage in a backdoor Roth, but wanted to make sure.

4. When do I have to make the contribution? If I set up the solo 401(k) by December 31, 2018 for tax year 2018, can I contribute until my taxes are due in April of 2019, or do I have to make all the employer contributions before December 31, 2018? Can I do it in one lump sum?

5. I've read up on where I should start the solo 401(k), and so far Vanguard and Fidelity are in the lead. I understand that E*Trade gets good reviews, but I have no previous relationship with them, and do not think it worth the hassle to start one for what may be a one-off contribution. Any new insights from anyone about the good/bad/ugly of brokerages for solo 401(k)s?

TIA for all your insights!

JBTX
Posts: 4087
Joined: Wed Jul 26, 2017 12:46 pm

Re: Solo 401(k) Questions (and sanity check)

Post by JBTX » Sat Sep 08, 2018 9:53 pm

ChapMan wrote:
Sat Sep 08, 2018 9:13 pm
Hello Everyone,

I'm thinking of starting a solo 401(k) to stash some cash from a consulting job I landed a few months back. I'm posting here for a sanity check to make sure I understand the concept/limits of a solo 401(k).

ASSUMPTIONS:
Gross income from consulting - $30,000
TSP/401(k) employee deductions from day job - maxed out
Gross MFJ income - ~$235,000 (including the $30,000 above)
Deductions - probably the standard deduction
Business expense deductions - Not sure yet, possibly ~$2,000 or so
Total income minus 7.65% employer contribution of self-employment taxes - $27,705
Consultant job - not eligible for 199A deduction (I think this is accurate)
No employees
Under 50 years old

QUESTIONS

1. I understand that in my situation, I am eligible to contribute, as an employer contribution, 20% of net business profit (I think that's the right term?). I believe that I can no longer make any employee contribution since I have already maxed out the $18,500 for the year (no employer match there, so we're not in danger of hitting the maximum $55,000 limit). In this case, it will be $30,000 - (7.65% of $30,000) = 27,705; 20% of 27,705 = $5,541. Is that accurate? What if I have business expense deductions? Does that come off the $27,705? For instance, if I have $2,705 of business expenses, does that mean that maximum I can contribute is 20% of $25,000 (0.2 * $25,000 = $5,000)?
I dont know if your calculations are exactly right but conceptually you are correct. It turns out to be approximately 20% of business profit, which would be lowered by any applicable business expenses. It is best to use a tax software calculator to get the exact number.

2. I believe that the employer contribution is deductible, assuming I do not do a Roth solo 401(k), so at the end of the tax year I'll owe income taxes on gross revenues - 1/2 of self-employment tax - business deductions - solo 401(k) contributions. So, in the case above, assuming I had business expense deductions worth $2,705, I would owe income taxes based on the following formula: $30,000 - $2,295 - $2,705 - $5,000 = $20,000. It that accurate?
Seems about right

3. I do not believe that this affect my ability to engage in a backdoor Roth, but wanted to make sure.

Correct. Does not affect backdoor Roth at all.


4. When do I have to make the contribution? If I set up the solo 401(k) by December 31, 2018 for tax year 2018, can I contribute until my taxes are due in April of 2019, or do I have to make all the employer contributions before December 31, 2018? Can I do it in one lump sum?
By tax day. The employer contribution is a function of business income and chances are you don't know the full year income by 12/31.

5. I've read up on where I should start the solo 401(k), and so far Vanguard and Fidelity are in the lead. I understand that E*Trade gets good reviews, but I have no previous relationship with them, and do not think it worth the hassle to start one for what may be a one-off contribution. Any new insights from anyone about the good/bad/ugly of brokerages for solo 401(k)s?

TIA for all your insights!
I've had a vanguard plan for a few years and it works fine. I have heard it is not a good plan if you want to employ your child and may be inflexible in other aspects. But if it is just you I've had no issues.

I've heard fidelity requires an actual check for contributions (which seems odd and I can't personally attest as to whether that is true)

Greenman72
Posts: 143
Joined: Fri Nov 01, 2013 2:17 pm

Re: Solo 401(k) Questions (and sanity check)

Post by Greenman72 » Sat Sep 08, 2018 10:43 pm

Most of what you said is correct. Except :

1. Consulting income qualifies for new 199A deduction.

2. Self employment tax is figured on your net income, not gross. So you would deduct your business expenses, figure tax at 15.3%, then take 1/2 as a deduction.

3. Actual calculation is: Net income from business minus SE Tax plus 1/2 of SE tax. Then take 20% of that.

In your case, it may be easier to do a SEP. you’ll get the same deduction, since you can’t make an individual contribution. But you don’t have all the 401 problems (TPA, compliance testing, 5500)

Greenman72
Posts: 143
Joined: Fri Nov 01, 2013 2:17 pm

Re: Solo 401(k) Questions (and sanity check)

Post by Greenman72 » Sat Sep 08, 2018 10:44 pm

And the deadline is April 15 plus extensions.

Greenman72
Posts: 143
Joined: Fri Nov 01, 2013 2:17 pm

Re: Solo 401(k) Questions (and sanity check)

Post by Greenman72 » Sat Sep 08, 2018 10:44 pm

And the deadline is April 15 plus extensions.

Spirit Rider
Posts: 8876
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401(k) Questions (and sanity check)

Post by Spirit Rider » Sat Sep 08, 2018 11:04 pm

Follow the IRS proscribed method for calculating one-participant maximum contributions for the self-employed. For Example:
  1. Schedule C: business profit = $30,000 business income - $2,000 business expenses = $28,000.
  2. Schedule SE: SE tax = $28,000 * 0.9235 = $25,858 * 0.029 = $750. The SE tax is only based on the 2.9% Medicare component, because your W-2 Box 3 SS wages are >= the SS maximum wage base (2018 = $128,400).
  3. IRS Publication 560, Deduction Worksheet for Self-Employed: Maximum employer contribution = $28,000 business profit - $375 1/2 SE tax = $27,625 net self-employment earnings * 0.20 = $5,525.

Spirit Rider
Posts: 8876
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401(k) Questions (and sanity check)

Post by Spirit Rider » Sat Sep 08, 2018 11:43 pm

Greenman72 wrote:
Sat Sep 08, 2018 10:43 pm
In your case, it may be easier to do a SEP. you’ll get the same deduction, since you can’t make an individual contribution. But you don’t have all the 401 problems (TPA, compliance testing, 5500)
A one-participant 401k does not require a TPA, compliance testing or a Form 5500-EZ (unless the year-end balance is > $250K).

They are available from most mainstream brokerages without any cost or fees.

A SEP IRA will interfere with Backdoor Roths.

SelfEmployed123
Posts: 182
Joined: Sun Apr 15, 2018 8:57 pm

Re: Solo 401(k) Questions (and sanity check)

Post by SelfEmployed123 » Sun Sep 09, 2018 6:55 am

JBTX wrote:
Sat Sep 08, 2018 9:53 pm
I've had a vanguard plan for a few years and it works fine. I have heard it is not a good plan if you want to employ your child and may be inflexible in other aspects. But if it is just you I've had no issues.

I've heard fidelity requires an actual check for contributions (which seems odd and I can't personally attest as to whether that is true)
I opened a Fidelity solo 401k earlier this year. It has been great so far. The one complaint I have is to make contributions you either have to mail in a check or transfer funds from your bank account to a cash management account, wait 5 business days, then call the Fidelity Small Business Retirement office and verbally tell them to transfer it to your solo 401k. For those who have Vanguard, is making contributions easier?
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

JBTX
Posts: 4087
Joined: Wed Jul 26, 2017 12:46 pm

Re: Solo 401(k) Questions (and sanity check)

Post by JBTX » Sun Sep 09, 2018 11:27 am

SelfEmployed123 wrote:
Sun Sep 09, 2018 6:55 am
JBTX wrote:
Sat Sep 08, 2018 9:53 pm
I've had a vanguard plan for a few years and it works fine. I have heard it is not a good plan if you want to employ your child and may be inflexible in other aspects. But if it is just you I've had no issues.

I've heard fidelity requires an actual check for contributions (which seems odd and I can't personally attest as to whether that is true)
I opened a Fidelity solo 401k earlier this year. It has been great so far. The one complaint I have is to make contributions you either have to mail in a check or transfer funds from your bank account to a cash management account, wait 5 business days, then call the Fidelity Small Business Retirement office and verbally tell them to transfer it to your solo 401k. For those who have Vanguard, is making contributions easier?
For vanguard, I just eft it in from my bank. No issues.

SelfEmployed123
Posts: 182
Joined: Sun Apr 15, 2018 8:57 pm

Re: Solo 401(k) Questions (and sanity check)

Post by SelfEmployed123 » Sun Sep 09, 2018 12:04 pm

JBTX wrote:
Sun Sep 09, 2018 11:27 am
SelfEmployed123 wrote:
Sun Sep 09, 2018 6:55 am
JBTX wrote:
Sat Sep 08, 2018 9:53 pm
I've had a vanguard plan for a few years and it works fine. I have heard it is not a good plan if you want to employ your child and may be inflexible in other aspects. But if it is just you I've had no issues.

I've heard fidelity requires an actual check for contributions (which seems odd and I can't personally attest as to whether that is true)
I opened a Fidelity solo 401k earlier this year. It has been great so far. The one complaint I have is to make contributions you either have to mail in a check or transfer funds from your bank account to a cash management account, wait 5 business days, then call the Fidelity Small Business Retirement office and verbally tell them to transfer it to your solo 401k. For those who have Vanguard, is making contributions easier?
For vanguard, I just eft it in from my bank. No issues.
Can you set up automatic debit and investing with Vanguard’s solo 401k?
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

nolesrule
Posts: 774
Joined: Thu Feb 26, 2015 10:59 am

Re: Solo 401(k) Questions (and sanity check)

Post by nolesrule » Sun Sep 09, 2018 12:11 pm

SelfEmployed123 wrote:
Sun Sep 09, 2018 12:04 pm
JBTX wrote:
Sun Sep 09, 2018 11:27 am
SelfEmployed123 wrote:
Sun Sep 09, 2018 6:55 am
JBTX wrote:
Sat Sep 08, 2018 9:53 pm
I've had a vanguard plan for a few years and it works fine. I have heard it is not a good plan if you want to employ your child and may be inflexible in other aspects. But if it is just you I've had no issues.

I've heard fidelity requires an actual check for contributions (which seems odd and I can't personally attest as to whether that is true)
I opened a Fidelity solo 401k earlier this year. It has been great so far. The one complaint I have is to make contributions you either have to mail in a check or transfer funds from your bank account to a cash management account, wait 5 business days, then call the Fidelity Small Business Retirement office and verbally tell them to transfer it to your solo 401k. For those who have Vanguard, is making contributions easier?
For vanguard, I just eft it in from my bank. No issues.
Can you set up automatic debit and investing with Vanguard’s solo 401k?
No, but you select the investments as part of the contribution transfer setup. Takes a couple of minutes a month to manage it.

I no longer have my solo 401k at Vanguard. I found their contribution interface was simple and easy to use, but ultimately I switched to Fidelity because of the need for allowing incoming rollovers.

JBTX
Posts: 4087
Joined: Wed Jul 26, 2017 12:46 pm

Re: Solo 401(k) Questions (and sanity check)

Post by JBTX » Sun Sep 09, 2018 5:52 pm

SelfEmployed123 wrote:
Sun Sep 09, 2018 12:04 pm
JBTX wrote:
Sun Sep 09, 2018 11:27 am
SelfEmployed123 wrote:
Sun Sep 09, 2018 6:55 am
JBTX wrote:
Sat Sep 08, 2018 9:53 pm
I've had a vanguard plan for a few years and it works fine. I have heard it is not a good plan if you want to employ your child and may be inflexible in other aspects. But if it is just you I've had no issues.

I've heard fidelity requires an actual check for contributions (which seems odd and I can't personally attest as to whether that is true)
I opened a Fidelity solo 401k earlier this year. It has been great so far. The one complaint I have is to make contributions you either have to mail in a check or transfer funds from your bank account to a cash management account, wait 5 business days, then call the Fidelity Small Business Retirement office and verbally tell them to transfer it to your solo 401k. For those who have Vanguard, is making contributions easier?
For vanguard, I just eft it in from my bank. No issues.
Can you set up automatic debit and investing with Vanguard’s solo 401k?
I don't know. Havent tried it.

ChapMan
Posts: 146
Joined: Wed Nov 24, 2010 8:53 pm

Re: Solo 401(k) Questions (and sanity check)

Post by ChapMan » Mon Sep 10, 2018 2:52 pm

Thanks for the amazing replies, everyone! Some clarifying questions below:

JBTX - Thanks for the info. It looks like the less I deduct as business expenses, the more I can save into the solo 401(k). I'll have to look at what I actually want to deduct now.

Does anyone know if I have to actually open the solo 401(k) before the end of the calendar year, or can I open it AND fund it in 2019 for tax year 2018?

Regarding 199A, the IRS seems to include consulting as something specifically excluded from this deduction (see Q5 here - https://www.irs.gov/newsroom/tax-cuts-a ... ncome-faqs). Or am I misreading?

Spirit Rider - Thanks for the calculation sample, but unfortunately we're filing married filing jointly and I haven't topped out on SS yet based on my salary.

Looks like I'll look into Vanguard, thanks everyone!

nosivol
Posts: 10
Joined: Fri May 09, 2014 8:44 am

Re: Solo 401(k) Questions (and sanity check)

Post by nosivol » Mon Sep 10, 2018 4:11 pm

ChapMan wrote:
Mon Sep 10, 2018 2:52 pm
https://www.irs.gov/newsroom/tax-cuts-a ... ncome-faqs). Or am I misreading?
It's only not allowed if your income is above the following: "$315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers".

Since you have ~235K in income MFJ you are below the 315K threshold. Sec199A is good to go for you.

ChapMan
Posts: 146
Joined: Wed Nov 24, 2010 8:53 pm

Re: Solo 401(k) Questions (and sanity check)

Post by ChapMan » Mon Sep 10, 2018 6:23 pm

nosivol wrote:
Mon Sep 10, 2018 4:11 pm
ChapMan wrote:
Mon Sep 10, 2018 2:52 pm
https://www.irs.gov/newsroom/tax-cuts-a ... ncome-faqs). Or am I misreading?
It's only not allowed if your income is above the following: "$315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers".

Since you have ~235K in income MFJ you are below the 315K threshold. Sec199A is good to go for you.
Wow I am bad at this. I need to read better!

TwstdSista
Posts: 987
Joined: Thu Nov 16, 2017 4:03 am

Re: Solo 401(k) Questions (and sanity check)

Post by TwstdSista » Mon Sep 10, 2018 6:44 pm

ChapMan wrote:
Mon Sep 10, 2018 2:52 pm
Does anyone know if I have to actually open the solo 401(k) before the end of the calendar year, or can I open it AND fund it in 2019 for tax year 2018?
I believe a solo 401k must be open in the year you wish to fund it -- so you must open it prior to 12-31-2018.

There is also a quirk about the Employee contribution must be determined in writing prior to the year ending, but it does not need to actually be funded until the tax deadline.

ChapMan
Posts: 146
Joined: Wed Nov 24, 2010 8:53 pm

Re: Solo 401(k) Questions (and sanity check)

Post by ChapMan » Mon Sep 10, 2018 7:21 pm

TwstdSista wrote:
Mon Sep 10, 2018 6:44 pm
ChapMan wrote:
Mon Sep 10, 2018 2:52 pm
Does anyone know if I have to actually open the solo 401(k) before the end of the calendar year, or can I open it AND fund it in 2019 for tax year 2018?
I believe a solo 401k must be open in the year you wish to fund it -- so you must open it prior to 12-31-2018.

There is also a quirk about the Employee contribution must be determined in writing prior to the year ending, but it does not need to actually be funded until the tax deadline.
Interesting. Since I already maxed out $18,500 for this tax year, I won't have to worry about the employee contribution at least.

nolesrule
Posts: 774
Joined: Thu Feb 26, 2015 10:59 am

Re: Solo 401(k) Questions (and sanity check)

Post by nolesrule » Mon Sep 10, 2018 7:43 pm

ChapMan wrote:
Mon Sep 10, 2018 2:52 pm
It looks like the less I deduct as business expenses, the more I can save into the solo 401(k). I'll have to look at what I actually want to deduct now.
Deduct all your legitimate expenses.

Spirit Rider
Posts: 8876
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401(k) Questions (and sanity check)

Post by Spirit Rider » Mon Sep 10, 2018 8:19 pm

nolesrule wrote:
Mon Sep 10, 2018 7:43 pm
ChapMan wrote:
Mon Sep 10, 2018 2:52 pm
It looks like the less I deduct as business expenses, the more I can save into the solo 401(k). I'll have to look at what I actually want to deduct now.
Deduct all your legitimate expenses.
IRS guidance actually requires this, if to not do so would result in a tax benefit (larger 401k contributions)

ChapMan
Posts: 146
Joined: Wed Nov 24, 2010 8:53 pm

Re: Solo 401(k) Questions (and sanity check)

Post by ChapMan » Mon Sep 10, 2018 8:47 pm

Spirit Rider wrote:
Mon Sep 10, 2018 8:19 pm
nolesrule wrote:
Mon Sep 10, 2018 7:43 pm
ChapMan wrote:
Mon Sep 10, 2018 2:52 pm
It looks like the less I deduct as business expenses, the more I can save into the solo 401(k). I'll have to look at what I actually want to deduct now.
Deduct all your legitimate expenses.
IRS guidance actually requires this, if to not do so would result in a tax benefit (larger 401k contributions)
Interesting. This makes sense, but does anyone happen to know the pub that has more details on this?

For instance, some things are easy - paper, toner, a printer used solely for business, etc. But I'm finding that a lot of my proposed deductions are in fact more or less judgment calls based on my estimated usage between business vs. private (cell phone, internet, a new computer, etc.). I'm keeping track as best I can, but the best I can do is offer that I have a good faith basis in my records. Is there more I can be doing?

Spirit Rider
Posts: 8876
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401(k) Questions (and sanity check)

Post by Spirit Rider » Mon Sep 10, 2018 9:09 pm

ChapMan wrote:
Mon Sep 10, 2018 8:47 pm
For instance, some things are easy - paper, toner, a printer used solely for business, etc. But I'm finding that a lot of my proposed deductions are in fact more or less judgment calls based on my estimated usage between business vs. private (cell phone, internet, a new computer, etc.). I'm keeping track as best I can, but the best I can do is offer that I have a good faith basis in my records. Is there more I can be doing?
IRS Publication 535. Your last sentence is all anyone can do. What I was referring to was intentionally increasing your income to derive a tax benefit.

The major concern is the Earned Income Credit (EIC). Tax preparers are under threat of IRS sanctions if they do not do due diligence to ensure all deductions are taken when to not do so benefits the taxpayer. This is because the EIC is an inverse V. On the front side of the peak you get 40 cents EIC for each additional dollar in income. A strong incentive to minimize deductions.

ChapMan
Posts: 146
Joined: Wed Nov 24, 2010 8:53 pm

Re: Solo 401(k) Questions (and sanity check)

Post by ChapMan » Wed Sep 12, 2018 9:07 pm

Thanks, I'm way out of EIC territory, unfortunately (or fortunately?).

One more question popped up - I'm thinking more and more about a solo Roth 401(k) since Vanguard has this option. Can the employer contribution go into the Roth 401(k) (since I've used up all the employee space already)? If so, I imagine that the employer contribution is no longer deductible. Is that accurate?

Spirit Rider
Posts: 8876
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401(k) Questions (and sanity check)

Post by Spirit Rider » Wed Sep 12, 2018 9:47 pm

No, employer contributions must be pre-tax.

ChapMan
Posts: 146
Joined: Wed Nov 24, 2010 8:53 pm

Re: Solo 401(k) Questions (and sanity check)

Post by ChapMan » Wed Oct 17, 2018 3:41 pm

Alright, thank you all for the replies. As I was going through my calculations, another question popped into my head about the order of operations:

How does the 199A deduction interact with the 20% profit I am allowed to put into the solo 401(k) as my employer contribution?

My original thought process was as follows:

1. $30,000 gross revenue (assume no business expenses just to make it easier).
2. One half of SE tax (7.65%) would be $2,295.
3. 20% 199A deduction of $30,000 gross revenue would be $6,000.
4. The profit would therefore be: $30,000 - $2,295 - $6,000 = $21,705.
5. 20% of my profit would be: $21,705 * .2 = $4,341.
6. This means that the maximum the employer could contribute is $4,341.
7. If I contribute the maximum, my taxable income from this would be: $30,000 - $2,295 - $6,000 - $4,341 = $17,364.

However, after reading some third party websites (such as https://www.watsoncpagroup.com/section-199a-deduction/) and this thread (viewtopic.php?t=241317), I'm starting to think that my math is off and that the order of operations should be as follows (amended plan):

1. $30,000 gross revenue (assume no business expenses just to make it easier).
2. One half of SE tax (7.65%) would be $2,295.
3. Take out the $2,295 immediately: $30,000 - $2,295 = $27,705.
4. $27,705 is my profit, so I can put in 20% of that into my solo 401(k): $27,705 * .2 = $5,541. I can put in a maximum of $5,541 into my solo 401(k).
5. I can then take my 199A deduction of 20% of $30,000: $30,000 * .2 = $6,000
6. If I contribute the maximum, my taxable income from this would be: $30,000 - $2,295 - $6,000 - $5,541 = $16,164.

Is my original thought process or amended thought process correct?

Spirit Rider
Posts: 8876
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401(k) Questions (and sanity check)

Post by Spirit Rider » Wed Oct 17, 2018 6:10 pm

ChapMan wrote:
Wed Oct 17, 2018 3:41 pm
1. $30,000 gross revenue (assume no business expenses just to make it easier).
2. One half of SE tax (7.65%) would be $2,295.
The 12.4% component of the 15.3% SE tax does not apply if your If your W-2 Box 3 Social Security (SS) earnings + (business profit * 92.35%) are > the SS maximum wage base (2018 = $128,400). Then your 1/2 SE tax calculation is incorrect. In fact, if just your W-2 Box 3 SS earnings are >= $128,400. Only the 2.9% Medicare component applies. Your 1/2 SE tax = $30,000 * 92.35% = $27,705 * 1.45% ~= $402.
3. Take out the $402 immediately: $30,000 - $402 = $29,598.
4. $29,598 is my profit net self-employment earnings, so I can put in 20% of that into my solo 401(k): $29,598 * .2 = $5,920. I can put in a maximum of $5,920 into my solo 401(k).
5. I can then take my 199A deduction of 20% of $30,000: $30,000 * .2 = $6,000

Is my original thought process or amended thought process correct?
Your amended thought process will be correct if your W-2 Box 3 Social Security (SS) earnings + (business profit * 92.35%) are <= the SS maximum wage base (2018 = $128,400). If just your W-2 Box 3 SS earnings are >= $128,400 my numbers will be correct.

In between requires a proper calculation from Schedule SE, tax software or a calculator that takes your W-2 Box 3 into account. Be aware that almost all web calculators will give incorrect results. The only two I am aware of that will give you a correct result are from two forum members, ObliviousInvestor and tfb (AKA The Finance Buff). The former is a simple calculator for your specific circumstances and the latter is a much more flexible and thus complex spreadsheet that handles many more unique situations.

See the Draft 2018 Form 1040 Instructions, Line 9 Qualified Business Income Deduction (Section 199A Deduction), pages 34 & 36 and the 2018 Qualified Business Income Deduction—Simplified Worksheet on page 37.

ChapMan
Posts: 146
Joined: Wed Nov 24, 2010 8:53 pm

Re: Solo 401(k) Questions (and sanity check)

Post by ChapMan » Wed Oct 17, 2018 7:52 pm

Spirit Rider wrote:
Wed Oct 17, 2018 6:10 pm
ChapMan wrote:
Wed Oct 17, 2018 3:41 pm
1. $30,000 gross revenue (assume no business expenses just to make it easier).
2. One half of SE tax (7.65%) would be $2,295.
The 12.4% component of the 15.3% SE tax does not apply if your If your W-2 Box 3 Social Security (SS) earnings + (business profit * 92.35%) are > the SS maximum wage base (2018 = $128,400). Then your 1/2 SE tax calculation is incorrect. In fact, if just your W-2 Box 3 SS earnings are >= $128,400. Only the 2.9% Medicare component applies. Your 1/2 SE tax = $30,000 * 92.35% = $27,705 * 1.45% ~= $402.
3. Take out the $402 immediately: $30,000 - $402 = $29,598.
4. $29,598 is my profit net self-employment earnings, so I can put in 20% of that into my solo 401(k): $29,598 * .2 = $5,920. I can put in a maximum of $5,920 into my solo 401(k).
5. I can then take my 199A deduction of 20% of $30,000: $30,000 * .2 = $6,000

Is my original thought process or amended thought process correct?
Your amended thought process will be correct if your W-2 Box 3 Social Security (SS) earnings + (business profit * 92.35%) are <= the SS maximum wage base (2018 = $128,400). If just your W-2 Box 3 SS earnings are >= $128,400 my numbers will be correct.

In between requires a proper calculation from Schedule SE, tax software or a calculator that takes your W-2 Box 3 into account. Be aware that almost all web calculators will give incorrect results. The only two I am aware of that will give you a correct result are from two forum members, ObliviousInvestor and tfb (AKA The Finance Buff). The former is a simple calculator for your specific circumstances and the latter is a much more flexible and thus complex spreadsheet that handles many more unique situations.

See the Draft 2018 Form 1040 Instructions, Line 9 Qualified Business Income Deduction (Section 199A Deduction), pages 34 & 36 and the 2018 Qualified Business Income Deduction—Simplified Worksheet on page 37.
Thanks! I appreciate your edits! Based on my rough calculations, it looks like my consulting income might *just* push me over the edge of the SS maximum wage base, so it won't apply to maybe $2k of my consulting income. Irrespective of that, the important part is that it looks like my amended thought process is what will apply.

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