Self Employed and Maxing Out a 401(k) $60,000

[Malum Prohibitum]

I am mulling over some future opportunities that may make this something that is possible.

The maximum that can go into a 401(k) in 2017 is $60,000, which consists of $18,000 in deferred compensation (i.e., taken out of your check), a $6000 catchup (I turn 50 this year), and a total maximum of $54,000, which is $60,000 in my case, due to the catch up provision.

Assume I own a corporation that is taxed as an S corp.  I own it.  I have no employees other than myself.

This means $24,000 taken from wages, and $36,000 corporate match. 

The $60,000 is limited, however.  The total match cannot be more than 25% of W-2 income.

This is where my question arises.  My calculator tells me that $36,000 x 4 = $144,000.

So, if I pay myself $144,000, I can put away the entire $60,000 in 2017?

Is the $144,000 reduced by the $24,000 I have taken from my paycheck, or is the entire $144,000 counted for purposes of determining whether I can sock away the extra $36,000 as a match?

So I would need enough revenue to pay myself $144,000 and to make the corporate match, another $36,000, after all of my other expenses.

Does this all look correct?  My main question is whether the payroll deductions reduce my W-2 income, or not, but any of you smart people are welcome to chime in with any additional information I have overlooked.  Thank you.

[Malum Prohibitum]

Thought I would bump this to the top since it is Monday.  Would $144,000 salary show sufficient W-2 income, or do you need to account for the $24,000 payroll deductions to the 401(k)?

[Papa bear]

I had a 401(k) quoted for my small business.  It was a few thousand in set up costs and annual costs of 1000+.  That was the best I could find.   Decided to do a SIMPLE ira instead.


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[jwright]

Thought I would bump this to the top since it is Monday.  Would $144,000 salary show sufficient W-2 income, or do you need to account for the $24,000 payroll deductions to the 401(k)?

You are correct that you would only need to show $144,000 in wages.  The fact that you choose to defer $18.000 pre-tax does not change the amount of wages you earned.

[Malum Prohibitum]

Knaak, thank you.  I missed that one.  Jwright, thanks.  PapaBear, I already have one, so the setup cost is not a concern at this point (mine was no cost to set up).

[Heroes821]

I had a 401(k) quoted for my small business.  It was a few thousand in set up costs and annual costs of 1000+.  That was the best I could find.   Decided to do a SIMPLE ira instead.


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For a business with employees that is probably a normal figure. For the solo or individual 401k for a sole proprietor/ s-corp owner I set mine up through vanguard for free.

[simplified]

If you have a spouse who doesn't have a 401k already through her employer, she can also contribute 18k + 6k if over 50. That way, you won't have to pay yourself 144k and end up paying the payroll taxes on a bigger amount. You can arrive at the 60k limit and pay less taxes on the rest.

Basically your W2 income will be less, saving 15% tax on the difference.

[Malum Prohibitum]

If you have a spouse who doesn't have a 401k already through her employer, she can also contribute 18k + 6k if over 50. That way, you won't have to pay yourself 144k and end up paying the payroll taxes on a bigger amount. You can arrive at the 60k limit and pay less taxes on the rest.

Basically your W2 income will be less, saving 15% tax on the difference.

  simplified, do you mean by employing her at my business or something else?  Would you please explain?

[Heroes821]

If you have a spouse who doesn't have a 401k already through her employer, she can also contribute 18k + 6k if over 50. That way, you won't have to pay yourself 144k and end up paying the payroll taxes on a bigger amount. You can arrive at the 60k limit and pay less taxes on the rest.

Basically your W2 income will be less, saving 15% tax on the difference.

  simplified, do you mean by employing her at my business or something else?  Would you please explain?

I don't have the exact answer, but there is a trick with spouses and LLCs that makes it easy to consider them like an employee/owner but without losing your sole proprietor status. I haven't looked into it yet.

[Malum Prohibitum]

I don't have the exact answer, but there is a trick with spouses and LLCs that makes it easy to consider them like an employee/owner but without losing your sole proprietor status. I haven't looked into it yet.

  I am neither an LLC nor a sole proprietor, if it makes a difference for your advice:

Assume I own a corporation that is taxed as an S corp.  I own it.  I have no employees other than myself.

 

[Heroes821]

I don't have the exact answer, but there is a trick with spouses and LLCs that makes it easy to consider them like an employee/owner but without losing your sole proprietor status. I haven't looked into it yet.

  I am neither an LLC nor a sole proprietor, if it makes a difference for your advice:

Assume I own a corporation that is taxed as an S corp.  I own it.  I have no employees other than myself.

Huh. I'm new to owning an LLC but I'll be filing as an S-corp for 2017 so I was under the impression that S-corp filing required being an LLC under the hood so to speak, with C-corp being the only other corp out there.  The things you learn.

[jwright]

I don't have the exact answer, but there is a trick with spouses and LLCs that makes it easy to consider them like an employee/owner but without losing your sole proprietor status. I haven't looked into it yet.

  I am neither an LLC nor a sole proprietor, if it makes a difference for your advice:

Assume I own a corporation that is taxed as an S corp.  I own it.  I have no employees other than myself.

Huh. I'm new to owning an LLC but I'll be filing as an S-corp for 2017 so I was under the impression that S-corp filing required being an LLC under the hood so to speak, with C-corp being the only other corp out there.  The things you learn.

An LLC can elect to be taxed as an S-Corp.  A C-Corporation can file a Sub-chapter S election to be treated as an S-Corporation.

Tax treatment is the same, but legal distinctions between the two are numerous. 

[Davids]

I have nothing to add other than this is an awesome problem to have!!!

[Malum Prohibitum]

I have nothing to add other than this is an awesome problem to have!!!

  Sigh, it's hypothetical at the moment but may become reality if some opportunities come to fruition.

[Malum Prohibitum]

I don't have the exact answer, but there is a trick with spouses and LLCs that makes it easy to consider them like an employee/owner but without losing your sole proprietor status. I haven't looked into it yet.

  I am neither an LLC nor a sole proprietor, if it makes a difference for your advice:

Assume I own a corporation that is taxed as an S corp.  I own it.  I have no employees other than myself.

Huh. I'm new to owning an LLC but I'll be filing as an S-corp for 2017 so I was under the impression that S-corp filing required being an LLC under the hood so to speak, with C-corp being the only other corp out there.  The things you learn.

An LLC can elect to be taxed as an S-Corp.  A C-Corporation can file a Sub-chapter S election to be treated as an S-Corporation.

Tax treatment is the same, but legal distinctions between the two are numerous.

LLCs are taxed as a partnership.  There are a number of reasons why it would be a bad idea to change that. 

[SilveradoBojangles]

I have a single member LLC and file taxes as an S-corp, and have a similar problem. I want to maximize my retirement savings this year, and so I've been trying to figure out the tradeoff between paying more in FICA taxes in order to up my corporate contributions. I need to finish running the numbers, but for an income up to the Social Security income ceiling, it appears that you pay a slight premium in FICA taxes in order to contribute more to your 401k via the corporate contributions. I ran a low wage scenario vs a high wage scenario (total income of 100k in both) and it appears the increase in corporate contributions cost about 2K extra in FICA taxes during that year. But, if you account for that tax free growth over time, or if you have a different income tax situation, it may be worth it.

[Papa bear]

I don't have the exact answer, but there is a trick with spouses and LLCs that makes it easy to consider them like an employee/owner but without losing your sole proprietor status. I haven't looked into it yet.

  I am neither an LLC nor a sole proprietor, if it makes a difference for your advice:

Assume I own a corporation that is taxed as an S corp.  I own it.  I have no employees other than myself.

Huh. I'm new to owning an LLC but I'll be filing as an S-corp for 2017 so I was under the impression that S-corp filing required being an LLC under the hood so to speak, with C-corp being the only other corp out there.  The things you learn.

An LLC can elect to be taxed as an S-Corp.  A C-Corporation can file a Sub-chapter S election to be treated as an S-Corporation.

Tax treatment is the same, but legal distinctions between the two are numerous.

LLCs are taxed as a partnership.  There are a number of reasons why it would be a bad idea to change that.

LLC's are taxed as "check the box."  You can elect to have them taxed as a partnership, s corp, or c Corp. (Or it is considered a disregarded entity if it's sole owned and will be taxed on your 1040)


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[simplified]

If you have a spouse who doesn't have a 401k already through her employer, she can also contribute 18k + 6k if over 50. That way, you won't have to pay yourself 144k and end up paying the payroll taxes on a bigger amount. You can arrive at the 60k limit and pay less taxes on the rest.

Basically your W2 income will be less, saving 15% tax on the difference.

  simplified, do you mean by employing her at my business or something else?  Would you please explain?

Yes. Employ her at your business or make her a 20% owner. If you get paid 80k, she gets paid 20k, she can contribute 18k, you can contribute 18k, 25k is the 25% of 100k combined salary. I'm not listing the 6k catchup contributions. But you get the point. You reach the solo 401k limit while paying yourself less in salary.

When I setup my LLC, I made my wife 20% owner. She doesn't really have anything to do with my business, except being the 20% owner. I suggest talking to an Accountant.

[Malum Prohibitum]

You reach the solo 401k limit while paying yourself less in salary.

  I'll have to examine this a little more closely.  Thanks.