DB and DC contributions for Self- Employed

[Guest Golden Girl]

The sole proprietor has a DB contribution but also wants to fund 6% of earned income to the profit sharing plan

As usual, we develop the net earnings from self employment and subtract 1/2 SE Tax.

My question is do we then take that number and compute the 6% amount or subtract the DB contribution and then compute the 6% amount with what is left.

Any insight is greatly appreciated.

Lori

[frizzyguy]

It has always been my belief that you need to do both simultaneously. Get ready to turn on iterations in excel to figure that out!

I believe that the maximum that can be contributed to a profit sharing plan when a DB plan exists is:

.06 (Gross Income - 1/2 SE - DB Contrib - DC Contrib) = DC Contrib

And I believe that the plan compensation for the DB formula needs to be:

Gross Income - 1/2 SE - DB Contrib - DC Contrib = Earned Income for DB formula

The way I have been told to think about it is for a corporation, the corporation takes the deduction for the profit sharing and the defined benefit and then it passes through to the owners income. I think the easiest way to perform this calculation is to tell your client to make over a million dollars and then don't worry about self employment income calculations. Insert the 401(a)(17) limit and run your calculations that way. Please let me know how that goes over.

[SoCalActuary]

Except for some small adjustments, friz is doin' it right.

Other earned income matters. Income from other controlled business matters.

Wages matter, because they adjust the FICA cost.

The 1/2 FICA worked before we had the silly 2% tax reductions for 2011 and now 2012.

Now you should adjust by the deductible employer portion, which is more that 1/2 the total.

If you also have elective deferrals, the calculation is made before the deferrals are reduced,

then the DC amount is added to the deferrals to get the 415© compliance information.

But that was a good basic explanation.