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Matching contribution for sole prop. SIMPLE plan


Guest Steve Hample
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Guest Steve Hample

How does one handle the 3% (or 2%) matching employer contribution in the case of a sole proprietor? Is it a circular logic, Catch 22 situation?

Assume a professor made $10,000 in his sole proprietor summer consulting business, properly established a SIMPLE, contributed a $6,000 salary deferral and now is reminded of the 3% employer match.

Does he use 3% of $10,000 and then go back and enter $300 on line 19 of schedule C as an employer/company retirement plan expense which then makes his profit only $9,700 so he goes back and recalulates 3% of $9,700, etc. etc.... ad infinitum?

If so, it resembles the same circular logic for the 15% SEP limit for sole proprietors which gives rise to an infinite series of calculations with the ultimate converging series result of 13.04% or some such number which I once computed years ago for verification.

Has the IRS published a similar number to use in this example (something like 2.91%) or is my logic totally off base?

P.s. Sole propietors often focus on the $6,000 contribution and sometimes forget to make the 3% or 2% match for themselves. Strikes me this is something a computer program might flag for audit.

Thanks

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Guest Lynne Dennis

I will be very interested, too, in the reply to this question.

I have been told by IRS that they don't think I can make a matching contribution as a sole proprietor to my own SIMPLE-IRA.

My plan manager (Fidelity) told me I could and that it should go on the same line of the 1040 as the $6,000, i.e., increasing it to 6,000 + 3% of my net profit from Schedule C.

Actually, neither of these responses seemed logical to me, and my TaxCut sofrware would not allow me to follow Fidelity's advice.

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  • 2 weeks later...

My answer:

$10,000 times .9325 (IRC 1402(a)(11) = $9,235 which equals maximimum compenstion fom which the $6,000 can be deferred.

$9,235.00 times 3% equals $277.05 (matching based on pre-plan $10,000)

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  • 1 month later...
Guest Steve Hample

Update: Turbo Tax for Home & Office software suggests that one can use the 3% match either as an adjustment on the same line with the $6,000 OR as a business expense. Which indicates to me that the Turbo tax authors also could not get a definitive answer, at least before the software had to be released.

I like Gary's thoughts above. Yet there is still the infinite series question. Perhaps in his example one should not use 3% at the end but rather 2.608% following the 13.04% compared to 15% on the SEP self employed calculation. For most of my clients the dollars are small, but it would be nice to have IRS clarification now rather than be criticized later.

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