Author Topic: CPA’s- walk me thru IRS Pub 560 max contributions for self-employed  (Read 834 times)

GetSmart

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First I’m wondering if there is an interactive version of this worksheet (Pub 560 - Chapter5 - Deduction Worksheet for Self-Employed) online as I haven’t been able to find one or is it only in CPA software ?

In lieu of that I transferred the form into excel so I get the basic math of each line.

Assuming that Step 9 and Step 17 is the actual contributed amount for the tax year - the word ‘allowable’ is throwing me here  (and not the full $18k + 6k allowed - if you haven’t hit these limits)

I was just hoping someone could explain in a simple fashion the reasoning behind all the convoluted math of steps 10 - 20.  It must be for a reason - but I’m just not seeing it.  I do understand what they’re trying to achieve in the end result but not the round-about fashion of getting there.

Plus isn’t it a moot point if one hasn’t even contributed the max of 18k + 6k  ?  Although I supposed I could make a contribution from the employER side before hitting the max of individual side. But since it’s all combined on Line 28 why would it matter which side I put it on (unless I’m trying to hit the max)?

This is for a pass-thru entity of 2 person partnership to a 401k in case that matters.

Thanks !

DavidAnnArbor

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Re: CPA’s- walk me thru IRS Pub 560 max contributions for self-employed
« Reply #1 on: March 14, 2018, 09:08:18 PM »
Is this an S-corporation ?

GetSmart

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Re: CPA’s- walk me thru IRS Pub 560 max contributions for self-employed
« Reply #2 on: March 15, 2018, 08:38:51 AM »
Not an S-corp.  50/50 Partnership / husband and wife  -- so contributions are going into an i401k.

Agrona

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(Firstly, I apologize for the thread necromancy if that's frowned upon here. I arrived from searching the web for advice on this utterly incomprehensible form.)

In the spirit of putting an answer where you would have liked to have found it, and in saying something wrong on the Internet in the hope of it being corrected, I present this reply:

I was just hoping someone could explain in a simple fashion the reasoning behind all the convoluted math of steps 10 - 20.  It must be for a reason - but I’m just not seeing it.

I've wrestled with the form for a while, and I think I'm finally beginning to understand (most of) what it's doing. One problem I had was that I was coming from it trying to ask the question "how much can I elect to defer to maximize my deduction", but the form seems to assume that you already know how much you're deferring.

Anyway, I'm not a CPA, but here you go:

Step 7: this is the maximum deductible contribution you can make as the employer, based on the special employer rate multiplied by your compensation (i.e. "earned income", i.e. "net earnings from self employment", some caveats), which is capped at $270k/$275k/$280k (for 2017/18/19, respectively). See Chapter 4, Employer Deduction, "Deduction Limits".

Step 10: this is the maximum remaining contribution after elective deferrals. Qualified--e.g. 401(k)--(and other) plans have a total limit of $$50k/55k/$56k (for 2017/18/19). See Chapter 4, Contributions, "Limits on Contributions and Benefits".

Step 11: this is the remaining "net earnings from self employment" after your elective deferrals. This is another limit--you can't contribute more than 100% of your "net earnings from self employment". See same as above.

Step 12: This is the most vexing, unexplained bit of arcana. I have no idea why we divide this in half. I'm going to pretend it makes sense given that half of the self-employed tax comes from the "employer" and half from the "employee". But... I don't see how you get from that to this.

Step 13: You are not permitted to contribute more than the plan can take (line 10), or more than you have compensation (line 11), and you get no deduction for contributing over the deduction limit (line 7). This is that maximum that the employer can contribute and claim a deduction for.

Step 14: Calculate how much "net earnings from self-employment" remains after the maximum deductible employer contribution. If you're paying as an employer "first" (which the form seems to assume?), this limits how much you can contribute as an employee. (Because the total cannot exceed the limits defined in Chapter 4).

Step 15: Here we see whether your elective deferrals have gone over the maximum deductible limit, which is the deductible employer contribution plus your elective deferrals as an employee. I sort of get this from Table 1 in the introduction... I'm a little shaky here.

Steps 16..18: Just figuring out whether you have more compensation left that you can contribute tax-free as a catch-up contribution.

Step 19: Total deductible contributions that you've made, as employer, employee, and catch-up.

Step 21: Roth counts against the limit, but you don't get to deduct it because it isn't actually pre-tax (instead you get the tax break on the other end). Et Voila, you have your total deduction for 1040 line 28.

Plus isn’t it a moot point if one hasn’t even contributed the max of 18k + 6k  ?  Although I supposed I could make a contribution from the employER side before hitting the max of individual side. But since it’s all combined on Line 28 why would it matter which side I put it on (unless I’m trying to hit the max)?

I think: yeah, basically. Fidelity has a much nicer worksheet ("The Fidelity Self-Employed 401(k) Contribution Worksheet for Unincorporated Businesses") that goes through them in a smarter order. It does still have that unexplained "divide by 2", though.

GetSmart

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Thanks for responding Agrona (and this is your first post!?) -- that's impressive.  This is very helpful.

Although another issue just cropped up today and it sort of correlates to this so I'm not going to start a new thread for it.

I have a partnership that I consider a 'micro' business -- IOW it doesn't make much $ -- but just enough to fund part of the 401k.  Since the beginning I've been putting the total profit (shown on SK-1) split 50/50 between the 2 partners into the 401k.  Now I'm wondering if I should deduct the SE taxes from that profit before I make the total contribution. ( I guess that is step 11- 100% of 'net profit')

I hope someone here knows the answer -- my accountant doesn't seem to understand all the ins and outs of all my retirement plans (we have several retirement funds and several businesses) -- so I end up revising the contribution limit form and sending it back to them.  But now I'm questioning if I'm doing it right.  No one has ever said I'm doing this wrong and it's been almost 10 years.  Should I be fixing this or just fix it from this point forward ?

On a separate matter, I read somewhere that I didn't have to file a 'partnership return' but now I can't find the alternative  -- is there an easier way to file ?  I'd like to ditch the accountant all together and do it myself -- but these forms drive me nuts.

thanks!

DavidAnnArbor

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You always have to take into account the SE taxes when determining the net business profit to determine how much is available for the 401k contribution.