Sole proprietor and cushion

[ombskid]

Owner, sole proprietor files Sch C

In a dc plan, employee cost is reported on Sch C and reduces Net Sch C that goes to SE Tax calculation.

Net Sch C is adjusted by 1/2 of SE tax.

Then, for example, if the result of above is 100,000 for the owner the result could be 80,000 "compensation" and 20,000 contribution making the formula 25% of pay

I think this is accurate and basic for all of us

If the plan is a db, similar situation, where does the cushion amount go? It could make a big difference in what is "compensation" to the owner.

I hope the question makes sense.

[Lou S.]

Any employer contribution to the DB plan will reduce the Sole Proprietor's self employment income which can drastically effect the DB valuation in some cases.

In other words you are correct it could cause the SP to have very low compensation if a large "cushion" contribution is made. This can impact the 415(b) limit if owner doesn't already have a "good" high 3 years compensation. And can throw off testing in a DC/DB combo plan if SP comp becomes too low and you are using the current year testing method.

[ombskid]

If there are employees, does some of the cushion get allocated as cost on Sch c and the rest to employer contribution on 1040?

[Calavera]

Any reasonable and consistent method will do. However this is the accountant/tax advisor call. See previous discussion here: http://benefitslink.com/boards/index.php/topic/55122-allocation-of-contribution

[ombskid]

Thanks. I thought there was a previous discussion but couldn't find it