Self Employed Salary deduction

[Guest Gary Tencer]

I had a self-employed elect 100% of net income, which might be less than $6,000. Net income for 1998, will not be determined until 4/15/99. When is the correct time for the contribution to be remitted to the trustee? Do you have any cites to support your answer?

[Gary Lesser]

>>I had a self-employed elect 100% of net income, which might be less than

$6,000.

The IRS believes that only 92.35% of a self-employed's net income (defined as Net Earnings from Self-Employment) may be utilized for plan purposes. In addition, the amount would have to be recharachterized for the (assumed) 3 percent matching contribution. Assuming the 92.35 percent adjustment has not yet been made, then the contribution and matching contributions would be as follows (cents ommited). I have assumed three levels of net income.

Net Inc 92.35% Sal Red Match Total

~~~~~~~ ~~~~~~ ~~~~~~~ ~~~~~ ~~~~~~

$6,000 $5,541 $5,374 $166 $5,541

$5,000 $4,617 $4,479 $138 $4,617

$4,000 $3,694 $3,583 $111 $3,694

The idividual may possibly be entitled to a deduction under Code Section 164(f) for one-half of the self-employment tax.

>>Net income for 1998, will not be determined until 4/15/99.

I believe that the amount of compensation for tax and plan purposes is determined on the last day of the self-employed individual's taxable year; that is, generally, December 31. In the case of a partner, compensation is determined on the last day of the business taxable year. [see Treas Reg § 1.401(k)- 1(a)(6)(ii)(b)] So I suspect the same would apply to a sole proprietor.

>>When is the correct time for the contribution to be remitted to the trustee?

The IRS has never answered this question directly in the case of a self-employed individual, but the actual election to defer must be made _before_ 12:00 p.m. on December 31. As a practical matter, the deferrals are made periodically (and hopefully supported at year's end). Contributions for partners and sole proprietors could also be made at years end (provided they have not been paid out to the individual any sooner) and must be remitted timely (end of month + 30 days of date otherwise paid). The match can be made up until the due date of the return (including extensions).