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please verify my math for solo 401k contribution

Home Retirement Accounts please verify my math for solo 401k contribution

  • Avatar Simsima 
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    Status: Physician
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    I have a W2 job where I make over 250K.

    My 1099 hospitalist gig has a total income of 59,574.  I opened a solo 401K at E-trade in December 2018

    Total business expenses are 10,369

    Net: 49,205

    1/2 SE tax= 1/2(49205*0.9235*0.029)=659

     

    Max contribution to Solo 401K= 20% of (49205-659)=20% of 48546=9709.

     

    thanks in advance.

    #194498 Reply
    Avatar Marko-ER 
    Participant
    Status: Resident, Small Business Owner
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    Joined: 03/09/2016

    That looks good to me.  Sweet, I was hoping someone would post, I still have to do mine.

    #194508 Reply
    Liked by Simsima
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2136
    Joined: 06/24/2016

    Yep.

    (Schedule C line 31 – Schedule SE line 13) / 5.

    Shortcut if you maxed SS tax at another job is net profit * 0.19732.

    Make sure you’ve finalized your Schedules C and SE before getting up to the max contribution.  Excess employer contributions are a giant pain to clean up.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #194516 Reply
    Avatar DCdoc 
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    Status: Physician
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    Joined: 06/14/2016

    Seems like a hefty business expense for a side gig that is in the same field as your W2 job.  What are you deducting to get those business expenses?

    #194521 Reply
    Liked by Simsima
    Avatar DCdoc 
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    Piggybacking off your question, when doing this (similar setup – opened i401k in 2018).  Earned 1099 income in 2018.  I can make contribution for 2018 up until tax day (2019).  The form asks whether it is a “current” or “prior year” contribution.  I would select “prior” correct?

    #194524 Reply
    Liked by Simsima
    DMFA DMFA 
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    Status: Physician
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    Joined: 06/24/2016

    Piggybacking off your question, when doing this (similar setup – opened i401k in 2018).  Earned 1099 income in 2018.  I can make contribution for 2018 up until tax day (2019).  The form asks whether it is a “current” or “prior year” contribution.  I would select “prior” correct?

    Click to expand…

    Yep, prior year.

    It’s very important that your plan had been opened in and effective for 2018, or you wouldn’t have been able to do that.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #194527 Reply
    Liked by Simsima
    DMFA DMFA 
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    Joined: 06/24/2016
    Earnest refinancing bonus

    Seems like a hefty business expense for a side gig that is in the same field as your W2 job.  What are you deducting to get those business expenses?

    Click to expand…

    I’m guessing they were fairly liberal with things like CME, home office, trying to establish inter-work travel from home to work and maybe piggy-backing a vehicle onto that (trying for a §179 deduction or bonus depreciation), deducting things that were primarily for the W-2 job but also somewhat for the side job, deducting things that were mostly for personal use but also somewhat for business use like phone, computer, internet, etc.

    Technically, you *can* deduct whatever you want on Schedule C.  Your audit potential is fairly low; the IRS only has so much resources in the form of people, money, time, and automated flagging algorithms, and so they’re only going to chase the big fish.  So the likelihood of “getting away with” this stuff without consequence is pretty high.  However, you’re taking responsibility for defending yourself in the unlikely event of an audit, in which case you’ll need to produce evidence of exclusive business use for all of the above…and if you can’t, you face back taxes and penalties.  This is what your accountant means when they say you “can’t” deduct something – they don’t think it’s within their loose-enough interpretation of the rules and they’re not willing to face the liability of standing up for it (low likelihood but high risk).

    This is why CPAs regularly advise moonlighters to deduct things proportionally; for example if you paid $1,000 for medical licensing and you work 80% at a W-2 employed job and 20% self-employed moonlighting, then only deduct $200 for it on Schedule C.  Personally I find that quite conservative, but I’m not liable for the result while they are.

    Also keep in mind that if you were taking a §199A deduction of 20% qualified business income, that’s taken directly on the 1040 and not on Schedule C…so the §199A does *not* reduce what you can contribute to a self-employed 401(k).  Likewise your own 401(k) contributions don’t reduce QBI and don’t reduce your §199A deduction as long as your QBI is less than your taxable income; if all your income is QBI (i.e. it’s your primary job), then the deduction is limited to 20% taxable income, which retirement contributions (and all deductions) *do* reduce.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #194530 Reply
    Avatar Simsima 
    Participant
    Status: Physician
    Posts: 22
    Joined: 05/07/2018

    Thanks for the replies guys.
    @DC doc: i used my car for side gig(2k in mileage deduction alone), a conference, meals, part of cellphone, hotels…..adds up. I not as conservative as DMFA mentioned above but now that you mentioned it, im going to take a good look to make sure i can defend all the expenses.

    #194537 Reply
    Avatar DCdoc 
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    Status: Physician
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    I may be too conservative with my deductions. But most of the things I could deduct – basically all the things you mention – I also need for my W2 job. And I made less in 1099 than you so doing it proportionally doesn’t generate much write off for me.

    #194539 Reply
    Liked by Simsima
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2136
    Joined: 06/24/2016

    Thanks for the replies guys.
    @DC doc: i used my car for side gig(2k in mileage deduction alone), a conference, meals, part of cellphone, hotels…..adds up. I not as conservative as DMFA mentioned above but now that you mentioned it, im going to take a good look to make sure i can defend all the expenses.

    Click to expand…

    Unless you meet primary and exclusive use of a home office – which is fairly difficult to do unless you have a large telehealth component to your business – you can’t deduct mileage or any vehicle-related expenses to/from home.  Home-to-work, aka commuting, is excluded from that.  If you have to go from hospital to hospital, for instance, that’s included, but hospital to home and vice versa aren’t.

    Meals are often only 50% deductible if at all.

    Again, you’ll most likely be fine.  Just keep in mind that $1,000 of deductions is worth at *most* $400 in income and self-employment taxes if you meet SS max at your primary job (more tax savings if in a high-tax state).  If chasing those extra few hundreds of dollars is worth the risk of penalties, go ahead.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #194558 Reply
    Liked by ENT Doc, Simsima
    Avatar Snag75 
    Participant
    Status: Physician
    Posts: 179
    Joined: 12/09/2018

    I have a W2 job where I make over 250K.

    My 1099 hospitalist gig has a total income of 59,574.  I opened a solo 401K at E-trade in December 2018

    Total business expenses are 10,369

    Net: 49,205

    1/2 SE tax= 1/2(49205*0.9235*0.029)=659

     

    Max contribution to Solo 401K= 20% of (49205-659)=20% of 48546=9709.

    Click to expand…

    I just went through all this and calculated using TurboTax (with a CPA helping due to a glitch in the TT software), and I thought that the 20% limit was for SEP-IRA contributions (of net profit), not for 401K (which has a total annual limit for employer contributions, but not a percentage of net profit), or so I thought?  Once we figured out the glitch in TT, this seemed to hold true (it calculated the amounts I could contribute to SEP vs soloK and the SEP was ~20% of the soloK (save the 1/2SE tax).  Where is this 20% coming from?

    #196194 Reply
    Avatar Peds 
    Moderator
    Status: Physician
    Posts: 4410
    Joined: 01/08/2016

    employer contributions.

    #196229 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    The OP was maximizing their employee elective contribution limit (2018 = $18,500, 2019 = $19,000) at their primary employer. Therefore, they could not make additional employee elective contributions to a one-participant 401k, only employer contributions.

    The maximum employer contribution rate is exactly the same for a SEP IRA as it is for a one-participant 401k. For a self-employed individual it is earned income (business profit – 1/2 SE tax) * 20%.

    If a one-participant 401k business owner has not made employee elective contributions to another 401k, 403b, SARSEP or SIMPLE IRA plan, they can make employee elective contributions to 100% of compensation not to exceed the limit.

    However, in another thread you also indicated that you had maximized your employee elective contributions. Therefore, the will be no difference between what you can contribute to either a SEP IRA or a one-participant 401k.

    There must be some error between you, your CPA and TT.

    #196329 Reply
    Liked by rmecc001, Peds
    Avatar pslfhopeful 
    Participant
    Status: Resident
    Posts: 27
    Joined: 05/14/2016

    I have a W2 job where I make over 250K.

    My 1099 hospitalist gig has a total income of 59,574.  I opened a solo 401K at E-trade in December 2018

    Total business expenses are 10,369

    Net: 49,205

    1/2 SE tax= 1/2(49205*0.9235*0.029)=659

     

    Max contribution to Solo 401K= 20% of (49205-659)=20% of 48546=9709.

     

    thanks in advance.

    Click to expand…

    Reviving an older thread.

     

    I’m in a similar position— main W2 gig exceeds SS maximum and is where I max out employEE 401k.

     

    Why does the Net income get reduced using the 0.9235 prior to multiplying by the Medicare tax (2.9%)?

    #234262 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1903
    Joined: 02/01/2016

    I have a W2 job where I make over 250K. My 1099 hospitalist gig has a total income of 59,574. I opened a solo 401K at E-trade in December 2018. Total business expenses are 10,369. Net: 49,205

    1/2 SE tax= 1/2(49205*0.9235*0.029)=659. Max contribution to Solo 401K= 20% of (49205-659)=20% of 48546=9709.

    Reviving an older thread. I’m in a similar position— main W2 gig exceeds SS maximum and is where I max out employEE 401k.

    Why does the Net income get reduced using the 0.9235 prior to multiplying by the Medicare tax (2.9%)?

    Click to expand…

    It is an attempt to level the playing field between W-2 FICA taxes and self-employment (SE) taxes. E.g. With $100K in W-2 Box 3 Social Security wages, the employer and employee each pay $7,650 in FICA taxes.

    A self-employed individual is both employer and employee and pays both halves of SS and Medicare taxes. Their business profit includes the employer half of SE taxes.

    Interesting Note: When you have W-2 Box 3 Social Security wages >= the maximum SS wage base, you still use the 92.35% multiplication factor even though you now only pay 2.9% SE taxes.

    #234280 Reply

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