Over at Bogleheads we came across the following discussion:
S Corp Solo 401k question
S Corp Solo 401k question
by dmcubfan » Sat Feb 22, 2014 11:21 am
I am new to the contracting/self employment game. I am an LLC set up as SCorp for tax purposes.
I have what should be a simple math question on the SOLO 401k. It seems to be the best setup for me given the options.
Say I make $200k after all expenses. $100,000 to me in a w2 and $100,000 as pass through. I defer $17,500 on the employee part. This is probably a silly question, but am I still on the hook on the corporate side for the employer part of the 15.3 SE taxes?
17500 * .153 / 2 = 1338.75
Thanks in advance,
David
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Re: S Corp Solo 401k question
by tfb » Sat Feb 22, 2014 4:01 pm
dmcubfan wrote:This is probably a silly question, but am I still on the hook on the corporate side for the employer part of the 15.3 SE taxes?
Yes, and the employee part too.
Harry Sit, taking a break from the forums.
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Re: S Corp Solo 401k question
by DSInvestor » Sat Feb 22, 2014 4:12 pm
Employee salary deferral to Solo 401k does not reduce your FICA (social security/medicare). It's no different than when you were working as an employee for a company. Your W-2 will show wages minus Traditional 401k contributions in box 1 but the other boxes for social security wages and medicare wages will include 401k contributions.
Are you going to max out the employer profit share contribution to Solo 401(k)? That's 25% of your W-2 salary or 25K. Combined with your employee contributions, that's a hefty 42.5K tax deduction.
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Re: S Corp Solo 401k question
by SteveKL » Sat Feb 22, 2014 4:21 pm
David, Welcome to the forum!
I am also an LLC taxed as an S corp, but I have employees so cannot use a solo 401K (we have a SIMPLE-IRA instead). That said, I'm not certain but I believe you may only be able to count your W-2 income for purposes of calculating the employer matching contribution, not the net S corp income from your K-1. Many S corp owners divide their income between wages (W-2 income) and owner draws (no unemployment taxes payable). How you make this delineation has important federal tax consequences, but also affects how your retirement plan contributions are calculated.
You asked "am I still on the hook on the corporate side for the employer part of the 15.3 SE taxes?" but it's not clear if you're referring to the $100K W-2 or the $100K K-1 portion...
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Re: S Corp Solo 401k question
by dmcubfan » Sat Feb 22, 2014 6:28 pm
DSInvestor wrote:Employee salary deferral to Solo 401k does not reduce your FICA (social security/medicare). It's no different than when you were working as an employee for a company. Your W-2 will show wages minus Traditional 401k contributions in box 1 but the other boxes for social security wages and medicare wages will include 401k contributions.
Are you going to max out the employer profit share contribution to Solo 401(k)? That's 25% of your W-2 salary or 25K. Combined with your employee contributions, that's a hefty 42.5K tax deduction.
Thank you to everyone for the replies.
I am planning on maxing it out on both sides. The answers on the FICA make it easier for me to do some "What-if" financial scenarios as I get my legs under me. I also see that it may be better to start out with the SEP first and then fire up the 401k. If I read correctly I would not be eligible to start up the SEP plan after I start up a solo 401k.
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Re: S Corp Solo 401k question
by DSInvestor » Sat Feb 22, 2014 6:32 pm
Why do you want a SEP-IRA? Solo 401k is all you need on the small business side. The employer side of Solo 401k is essentially the SEP-IRA contribution (up to 25% of W-2 salary). Solo 401k has advantages over SEP-IRA (larger contributions at 100K income), no complications with backdoor Roth IRA. 401k assets are not considered by form 8606 for Roth conversions. Backdoor into Roth IRA is a trick that folks use when their income is too high for Roth IRA contributions - they contribute to Traditional IRA and then convert to Roth IRA.
Did you start your self employed business in 2014 or 2013? If 2013, you must have opened the Solo 401k by Dec 31, 2013 in order to contribute for tax year 2013. If you missed this deadline, I suppose you could open a SEP-IRA now, contribute for 2013 and then rollover to Solo 401k later. Be aware that not all Solo 401k accept inbound rollovers from IRA - Vanguard's Individual 401k does not. Solo 401k from Fidelity and E-Trade do accept inbound rollovers. If you started the business in 2014, just open a solo 401k and stick with that.
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Re: S Corp Solo 401k question
by dmcubfan » Sat Feb 22, 2014 11:32 pm
DSInvestor wrote:Why do you want a SEP-IRA? Solo 401k is all you need on the small business side. The employer side of Solo 401k is essentially the SEP-IRA contribution (up to 25% of W-2 salary). Solo 401k has advantages over SEP-IRA (larger contributions at 100K income), no complications with backdoor Roth IRA. 401k assets are not considered by form 8606 for Roth conversions. Backdoor into Roth IRA is a trick that folks use when their income is too high for Roth IRA contributions - they contribute to Traditional IRA and then convert to Roth IRA.
Did you start your self employed business in 2014 or 2013? If 2013, you must have opened the Solo 401k by Dec 31, 2013 in order to contribute for tax year 2013. If you missed this deadline, I suppose you could open a SEP-IRA now, contribute for 2013 and then rollover to Solo 401k later. Be aware that not all Solo 401k accept inbound rollovers from IRA - Vanguard's Individual 401k does not. Solo 401k from Fidelity and E-Trade do accept inbound rollovers. If you started the business in 2014, just open a solo 401k and stick with that.
I did all of the paperwork in 2013, but I did not make the physical leap to doing anything with the company until a few weeks ago. I haven't opened any retirement accounts yet but I will soon. I have been researching all of my options (Solo 401 vs SEP vs Defined Benefit).
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