Estimating Profit Share?

[Vilgan]

Hi all,

I'm trying to roughly estimate how much profit share will be (with some cushion) so that I can contribute after-tax to max out the remainder of the 53k. I'm not planning on actually doing taxes until after the new year though, so trying to make a rough estimate now.

The numbers are made up, but the concept (and separate groups) are real:

60k W-2 (no profit sharing, separate plan)
15k sole prop income, 5k after expenses (not profit sharing this)
120k self employed income for 2015, 110k after expenses (profit sharing this as much as possible). This is a LLC taxed as a partnership, not a sole prop.

Can someone provide the process by which I would make a rough guess as to how much I'll end up profit sharing? I've heard 20% and 25%, so would I just say .25 * 110,000 or .20 * 110,000? Or will it be some other number since I won't have to pay SE tax on a good chunk of the partnership income?

Just trying to understand how to back of napkin math this, appreciate any help. Thanks!

[protostache]

Hi all,

I'm trying to roughly estimate how much profit share will be (with some cushion) so that I can contribute after-tax to max out the remainder of the 53k. I'm not planning on actually doing taxes until after the new year though, so trying to make a rough estimate now.

The numbers are made up, but the concept (and separate groups) are real:

60k W-2 (no profit sharing, separate plan)
15k sole prop income, 5k after expenses (not profit sharing this)
120k self employed income for 2015, 110k after expenses (profit sharing this as much as possible). This is a LLC taxed as a partnership, not a sole prop.

Can someone provide the process by which I would make a rough guess as to how much I'll end up profit sharing? I've heard 20% and 25%, so would I just say .25 * 110,000 or .20 * 110,000? Or will it be some other number since I won't have to pay SE tax on a good chunk of the partnership income?

Just trying to understand how to back of napkin math this, appreciate any help. Thanks!

Bolded is an important number. Why are you not paying SE tax on that amount? Are the "sole prop" and "self employed" lines separate businesses?

The maximum profit share is 25% of net self-employment profit. It's super confusing.

[maizefolk]

What a mess. The social security max is 118,500. You've got 60k in W-2 income which means you'll have to pay the higher SE tax rate of 15.3% on $58,500 of your sole prop and/or partnership income and the lower 2.9% SE tax rate on the remainder.

Question #1: Can you allocate your higher taxed self employment income first to the sole prop and only put the remainder in the partnership or do you have to consider the tax to be incurred proportionately by the two self employment income sources (reduces profit sharing)?

Then your profit sharing max will be:

20% of your partnership income - 10% of your self employment tax

This is based on algebra (which I was hoping I'd never have to use again after high school), so I'm showing my work below in case I've made an error someone else might catch:

What we know to start with:
Profit sharing max (P) = Salary (S) * .25
For someone who either owns a company or is part of a partnership:

Salary (S) (for the purposes of calculating profit sharing) = Total Income (I) - Profit Sharing (P) - 1/2 of your Self employment Taxes (T)

So:
P = S*.25
S = I - P - .5T
Substitute S out of the equation.
P = (I - P - .5T) * .25
Distribute the .25
P = .25I - .25P - .125T
Add .25P to both sides
1.25P = .25I - .125T
Divide both sides by 1.25:
P = .20I - .1T

This also shows you why people talk about sole proprietors get to contribute 20% while employees get to contribute 25%. The rule is actually exactly the same for both, it's just that when you own the company you tend to think of your salary as equal to the total profit the company made, not the part that's left over after taxes and profit sharing contributions.

[Vilgan]

Protostache: I meant I will hit the SE cap and thus will only pay the non medicare portion on roughly half the partnership income.

The sole prop and the self employed lines are separate businesses but pretty related. Basically freelance income before we decided to incorporate and make a business of it.

Maizeman: that makes sense. So something like 110k * .2 - .1 * (58500 * .153 + 51500 * .029) ?

So with those given numbers, it would be roughly: 22000 - 1045 or roughly 21k? I'm fine with rounding up, so with that math could just call it 22k and put in 31.5k aftertax into the 401k. If I miss out on a couple hundred dollars of profit sharing or unused cap that's fine, but would be sad if I saved 26k space but only ended up using 21k of it.

If it matters to the math, I can have the sole prop absorb full SE tax to open up more space on partnership income.

edit> not sure I can profit share the sole prop stuff since I set up the plan for the business. Its not very much after expenses so not hugely concerned about it.

[maizefolk]

Yup, in this scenario (you're assuming the worst case for social security, that after your W-2, all of it will come out of the partnership income and none from the sole prop) I agree you should be able to put in about $21k.

For maxing out social security from one self employed income source vs doing it proportionately: I don't legally know if it is an option. Even if you could, it'd get you less than a hundred dollars of additional profit sharing so it's probably not worth worrying about. The first time through you post I misread and thought you had $15k in profit from the sole prop, not $5k.