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?