Sole Prop Profit Sharing Limit

[richard]

A sole proprioetor has no employees. The profit sharing plan contribuition is 15% of compensation. What is "compensaton" for this purpose.

I know there are certain adjustments to the bottom-line number in the Schedule C to reflect Social Security -- what are these adjustments?

Thanks

[Guest ezollars]

The definition is tied to a couple of issues. First, the starting point is net earnings for self-employment as determined by Section 1402(a). In calculating that amount, there is allowed a subtraction equal to one half of the self-employment tax imposed.

Additionally, Section 402©(2) provides the detailed additional adjustemnts, the most significant of which is that you have to deduct the contribution to the plan allocable to the self-employed person in computing the compensation for plan purposes (IRC Sec. 401©(2)(A)(v)).

While an oversimplification, generally you'd take Schedule C earnings, reduce it by one half of the SE tax imposed *and* by the plan contribution in coming up with compensation for plan purposes. Obviously, there are a couple of circular calculations in there .

[This message has been edited by ezollars (edited 05-08-99).]

[Kathy]

We've always rounded the self-employed individual's contribution to 13.04% of Net business income minus 1/2 self-employement tax which equates to about 15% of that same income after the contribution is also deducted. A 25% contribution (MPPP and PS or just MPPP) works out to 20% of net business income minus 1/2 self-employment tax.

[Gary Lesser]

Since there are no employees AND the plan is not integrated AND the individual has no other businesses or W-2 income you may contribute 13.043478 percent of the amount subject to Self-Employment Tax (as shown on line 4 of Form 1040 Schedule SE, OR or 92.35 percent of line 31 of Form 1040). In ALL other cases you will want SOFTWARE (such as QP-SEP Illustrator) to interate the answer quickly. For more information on software contact GSL Galactic Consulting at 317-846-7704.