Sole Proprietor

[Guest robertcusick]

Client is a sole proprietor with approximately $17,000 in net income. Took no salary and does not wish to. Would like to defer entire net income.

Spouse has high income and contributes maximum to his employer plan.

Does not look like we can do this with a solo-401(k). Can 100% be deferred in a traditional PSP? If not is there another low-cost way to defer all income?

Thanks in advance and happy holidays.

[austin3515]

17,000 less 1/2 of the self employment taxes would be the best way to go. That ought to be pretty close to 16,500 if not a little bit less. You could even do a little profit sharing on top of that IF he's over 50, since you can exceed 100% of pay for 415 by the catch-up limit.

I'm assuming this is an owner/spouse only plan.

[Mike Preston]

While I don't disagree with the conclusion, I'm not sure what the 100% of pay 415 limit has to do with this conversation. If earned income is exactly 17k, then 1/2 of the FICA reduction is $1,201, and a 100% deferral is $15,799. The 100% of pay limit is also $15,799, but this would be limited by the 25% of pay limit to 15799 * .25 = $3,949. But any contribution made as a profit sharing contribution lowers the total, doesn't it?

[Guest robertcusick]

While I don't disagree with the conclusion, I'm not sure what the 100% of pay 415 limit has to do with this conversation. If earned income is exactly 17k, then 1/2 of the FICA reduction is $1,201, and a 100% deferral is $15,799. The 100% of pay limit is also $15,799, but this would be limited by the 25% of pay limit to 15799 * .25 = $3,949. But any contribution made as a profit sharing contribution lowers the total, doesn't it?

Thanks, these replies are very helpful. We were thinking 20% of line 31 or:

Net Earning (before qualified plan deduction) $17,000.00

Calculate 1402(a)(12)Deduction $15,699.50

Calculate Medicare & FICA $2,402.02

1/2 of Self-Employment Tax $1,201.01

Self-Employment Income $15,798.99

Under this scenario, can't the "employee" defer up to $16,500 or the entire $15,798.99, whichever is less?

If there was additional earnings, then the 20% (or 25% as you cite) would apply incrementally, no?

[K2retire]

Since deferrals no longer count toward the 25% deduction limit, Mike's suggested limit of $3,949 on deferrals seems wrong to me. the 100% of pay limit is likely the issue for the maximum deferrals. If the plan has a lower limit, that could also come into play.

[Mike Preston]

Since deferrals no longer count toward the 25% deduction limit, Mike's suggested limit of $3,949 on deferrals seems wrong to me. the 100% of pay limit is likely the issue for the maximum deferrals. If the plan has a lower limit, that could also come into play.

Huh? I don't think that I implied that $3,949 was a limit on deferrals. It was the limit on emplorER funds, but I used the wrong percentage. I should have used 20%, not 25%, so the actual limit is $3,159. But any use of employer contributions wouldn't change the fact that the maximum total that can be put into the plan is the net earned income. Since the net earned income is less than the 402(g) limitation, the maximum can be structured as solely a 401(k) deferral and there is no need to complicate things with an employer contribution.

[Guest Capt. Mike]

Since deferrals no longer count toward the 25% deduction limit, Mike's suggested limit of $3,949 on deferrals seems wrong to me. the 100% of pay limit is likely the issue for the maximum deferrals. If the plan has a lower limit, that could also come into play.

Huh? I don't think that I implied that $3,949 was a limit on deferrals. It was the limit on emplorER funds, but I used the wrong percentage. I should have used 20%, not 25%, so the actual limit is $3,159. But any use of employer contributions wouldn't change the fact that the maximum total that can be put into the plan is the net earned income. Since the net earned income is less than the 402(g) limitation, the maximum can be structured as solely a 401(k) deferral and there is no need to complicate things with an employer contribution.

Sorry to dig this old thread up but can some one tell me if the conclusion here was that the "employee" defer up to $16,500 or the entire $15,798.99, whichever is less?

Kind regards, Capt. Mike

[ETA Consulting LLC]

Correct! This is the Schedule C amount less 1/2 Self Employment taxes. He can defer the entire amount (up to $16,500). So, you are right.

Good Luck!

[Guest Capt. Mike]

Correct! This is the Schedule C amount less 1/2 Self Employment taxes. He can defer the entire amount (up to $16,500). So, you are right.

Good Luck!

Thank you!

Capt. Mike