Check my math on Solo 401K?

[Credaholic]

I'm getting ready to fund a self-employed 401K. I just want to check my math and my understanding of the tax affect. I'm a self-employed contractor (so sole-proprietor, no corporation.) I'm using $100,000 net earnings as an example to keep things easy.

$100,000 x .153 x .9235 = $14,129.55 self employment tax
20% of net earnings – ½ self employment tax = $18,587.05 profit share maximum

So now on my Schedule C, the $18,587.05 would be entered on line 19 (pension and profit-sharing plans) right? Which would then bring the net profit down to $81,412.95. So now the self employment tax is $11,503.28.

Hope I'm understanding that correctly so far!

So now, on the 1040 side, the business income is $81,412.95. If I also contribute the $17,500 of employee contributions then that is entered on line 28 of the 1040, bringing my adjusted gross income to $63,912.95.

If I'm looking at taxes correctly, it means I should first contribute to the profit sharing side, and then to the employee side? (This complicates things a little since I'm not 100% sure I'll be able to max out both sides and I know I have to do employee contributions by Dec. 31st but then have extra time for the profit sharing.)

I'm also realizing that there would be a lot of tax savings if I set myself up as an S-Corp. Can anyone explain to me how the profit sharing side works when you're paying yourself a salary from an S-Corp?

[MooseOutFront]

I think the employee and employer contributions are added together and entered on line 28 of the 1040.  No effect on Schedule C.  Others here probably know better but that was the result of my relatively recent research into this.

My recent research showed Fifelity's solo 401k calculator as the only accurate one out there fwiw. 

[Credaholic]

I think the employee and employer contributions are added together and entered on line 28 of the 1040.  No effect on Schedule C.  Others here probably know better but that was the result of my relatively recent research into this.

My recent research showed Fifelity's solo 401k calculator as the only accurate one out there fwiw.

That makes more sense, I was a little confused about why the profit sharing portion would be based on a calculation involving the self-employment tax but then change the self-employment tax. So it's only ever reported on the Schedule C if your business is contributing towards *other* employees?

Given this, it doesn't make any difference whether I contribute to the profit share or the employee side first, right? That will at least make my life easier since I can max the employee contribution now and then decide next year how much I can afford to put towards the profit share.

[bacchi]

Yeah, that's what I do: individual first and then calculate the exact employee contribution in January.

Use the Fido calculator or worksheet. I think SE taxes are taken out even for employee contributions. Another reason to incorporate.

[MooseOutFront]

That makes more sense, I was a little confused about why the profit sharing portion would be based on a calculation involving the self-employment tax but then change the self-employment tax. So it's only ever reported on the Schedule C if your business is contributing towards *other* employees?

Yes.  That is my understanding.

[BlueHouse]

If I'm looking at taxes correctly, it means I should first contribute to the profit sharing side, and then to the employee side? (This complicates things a little since I'm not 100% sure I'll be able to max out both sides and I know I have to do employee contributions by Dec. 31st but then have extra time for the profit sharing.)

I'm also realizing that there would be a lot of tax savings if I set myself up as an S-Corp. Can anyone explain to me how the profit sharing side works when you're paying yourself a salary from an S-Corp?

I'm not sure what part of equation you're looking for, but my biz isn't up as an s-corp and I pay the employee portion through the year and wait until year end to pay profit sharing.  It makes no difference tax wise as both sides are treated the same by both employee and employer. Both parts are treated as expense to employer and both parts are only taxed upon withdrawal by employee (I have traditional, not Roth 401k.  The reason (I think) that I have to max the employee portion is to reduce my AGI. So the goal for me is to pay myself a "reasonable wage" and take the rest in distributions.  I don't pay 4.5% Medicare tax on the distribution part. Other than that, my expenses are low, so I don't get enormous tax advantage out of being an s-corp vs Llc or sole prop.