401k or PS - any PR Tax Difference?

[austin3515]

Self employed individual. Trying to figure out if it makes sense to load up the profit sharing before doing any 401k (forget about the year-end election thing for the time being). Are the two treated any differently for payroll taxes? My belief is no, they are not. I know the owner gets no deduction for the 401k, and I don't believe they get a deduction for the profit sharing.

Since it is very connected, I will say that I've always been bothered by the fact that they don't get to deduct their SE income for profit sharing because I believe that puts corporations at an advantage over self employed peple (i.e., S-Corop owners do not pay payroll taxes on the amount of their profit sharing.

Any thoughts?

[ETA Consulting LLC]

You seem to have a pretty accurate grasp. There is no payroll tax advantage, since the Schedule is already reduced by 1/2 the self-employment taxes prior to the allocation.

One advantage from the partnership is that the partnership side gets to the TWB sooner in the event the individual is employed elsewhere. Suppose an individual works full-time making $110K and is self-employed making $50K. For his self employment income, his payroll is at 2.9% from the beginning. If he were incorporated, the S-Corp would not get the 6.2% reduction for him already being above the TWB on other employment.

I mention this to express that, while I don't know all details, the S-Corp is more retirement plan friendly but there are many other contengencies outside of the retirement plan arena that may have a greater impact. Also, the S-Corp allows a little more flexibility with respect to how much W-2 the owner should take (as long as it is reasonable). This opens the door to take less income (and maximize the deferrals for deductibility) as opposed to recognizing payroll taxes on on potentially everything. There's always another vantage point.

But, in all, I agree with your view.

Good Luck!

[Lou S.]

Self employed individual. Trying to figure out if it makes sense to load up the profit sharing before doing any 401k (forget about the year-end election thing for the time being). Are the two treated any differently for payroll taxes? My belief is no, they are not. I know the owner gets no deduction for the 401k, and I don't believe they get a deduction for the profit sharing.

Since it is very connected, I will say that I've always been bothered by the fact that they don't get to deduct their SE income for profit sharing because I believe that puts corporations at an advantage over self employed peple (i.e., S-Corop owners do not pay payroll taxes on the amount of their profit sharing.

Any thoughts?

The 401(k) portion does not recude the SE's pay for PS calculation and the 401(k) portion doesn't go against the 25% deduction limit which I'm sure you already know. But you are right in that both are treated the same for payroll tax purposes.

Ans yes that is one of the disadvantages or SE v Corp.