after-tax contributions impact on sole prop calculation

I do not work enough with after-tax contributions and came across a question for an owner-only sole prop where the owner wants to contribution profit sharing and after-tax.

(1) The owner has gross income for the year is $100,000.  Minus expenses (not counting plan contributions), this his net compensation down to $80,000.

(2) He is looking to contribute 20% profit sharing and, as much after-tax as he can (under age 50 FWIW)

Do we determine the PS amount first and then subtract the after-tax or after-tax first and then PS?

Thank you

Mike

The after-tax contribution wouldn't reduce his Earned Income.  Do the PS calculation first to see how much is left to be a potential after-tax amount.

It sounds like the owner's goal is to make the maximum deductible contribution and then make additional contributions potentially up to the annual additions limit.

You do have to stay within the constraints of the plan provisions, so the starting point is to confirm what types of contributions the plan allows.  Most owner-only plan documents I see allow just about everything: non-elective employer contributions "NEC" (e.g., profit sharing), pre-tax deferrals, Roth deferrals, after-tax, ...)

To attain this goal, typically you would maximize the NEC which will reduce the owner's Net Earnings from Self Employment "NESE".  Be careful because this calculation must take into consideration FICA and Medicare withholding taxes based on the NESE after the reduction for the NEC (a circular calculation).  This would be the first step.

If the owner wants additional deductible contributions, the owner should maximize pre-tax deferrals including, if eligible, catch-up contributions.

If the owner may decide to make Roth deferrals if the owner does not want to make additional deductible contributions.

If the sum of the owner's contributions has not yet reached the annual additions limit (lesser of $66,000 or 100% NESE after the NEC), the owner can make after-tax contributions that will bring the total of all contributions up to the that limit.

If you do not have experience with these calculations, I recommend using software that is designed to do this task.  Tax prep software can do these calculations, and some calculators provided by financial institutions can accommodate the level of detail needed to be accurate.

Good luck!

Thank you for those replies