Optimum SE earned income for maximum annual addition

[SMB]

I have calculated what I think to be the "optimum" amount of earned income that a 50+ self-employed business owner can make in 2012 in order to be able to receive the maximum annual addition (i.e., $55,500) in his/her solo 401(k) plan. I came up with $174,158.30.

Was wondering if anyone else has made (or will make) this determination and confirm my calculation.

Thanks!

[Mike Preston]

If you use the 2010 method, you are correct (my spreadsheet actually calls for 1 penny more, but that is probably due to rounding).

If you use the 2011 (and 2012) method, the amount would be $174,156.52.

[Jed Macy]

I get $173,950.94. What am I doing different?

SEI = $173,950.94

SET = 17,901.87; half of which is $8,950.94.

$173,950.94 minus $8,950.94 = $165,000 x 20% = $33,000 + $17,000 + $5,500 = $55,500.

[Mike Preston]

The law no longer has a simple 50% multiplier. In fact, the multiplier is 59.6% of 10.4% of Net Earnings from Self-Employment up to the wage base and 50% of 2.9% of all Net Earnings from Self-Employment.

So, the equation to get the self-employment tax is:

Min($174,156.52 * .9235,$110,100) * .104 * .596 + ($174,156.52 * .9235) * .029 * .5 = $9,156.52

Hence, the pension income is $174,156.52 - $9,156.52 = $165,000.00

Things get complicated if you have W-2 income, to boot.

[austin3515]

I refuse to update my spreadsheets for $2. Even 2$ time 25% is till just $.50.

[Tom Poje]

why not update your spreadsheet? It's not that hard.

Section B of form Schedule SE gives a clear walk through

[austin3515]

1) I know my current worksheet works, and if I change anyting, because I'm compulsive, I'll recheck the numbers multiple times before I'm comfortable again.

2) I will just have to change it back presumably in a year

3) It makes no difference.

But that's just me

[Mike Preston]

I found the 2010 change to the law that changed the multiplier to 59.6% for 2011 but I haven't been able to find the law that extended the lower tax rates for the first two months of 2012. Obviously, this whole thing becomes simpler if the lower rates are extended through the end of 2012. If so, then it will be very surprising if the 59.6% multiplier isn't continued for all of 2012.

The way the 2010 law was written, though, once the tax rates go back up, we revert to the pre-2011 methodology for all tax years that have not yet begun. Hence, if for some strange reason the tax rates go back up on March 1, 2012 we will still have the 59.6% multiplier in effect for the entirety of 2012 unless Congress does something to change it.

All we can do is wait and see.

[masteff]

but I haven't been able to find the law that extended the lower tax rates for the first two months of 2012.

http://thomas.loc.gov/cgi-bin/query/z?c112:H.R.3765: