SIMPLE for Self-Employed Person; Self-Employment Tax
Is the following correct?
An individual has $10,000 in net profit from an unincorporated business, as reportable on Schedule C. He has no regular job, but has interest and dividend income. He wants to set up a SIMPLE and maximize his contribution. His self-employment tax is 13.3% of 92.35% of $10,000 = $1,228.26 (Item 5 of Schedule SE Section A). The deduction for employer-equivalent portion of self-employment tax is 57.51% of $1,228.26 = $706.37. The base for a Keogh or similar plan is $10,000 – $706.37 = $9,293.63. He, as the employer must make a 3% matching contribution, because there is no exception for owner-employees, unlike the top heavy contribution requirement for a profit sharing plan being able to be satisfies by making it only to non-key employees. The $9,293.63 must be split into net compensation, call it C, and the 3% matching contribution. Thus, C + .03C = $9,293.63, 1.03C = $9,293.63 and C= $9,293.63 ÷ 1.03 = $9,022.94. The matching contribution is equal to .03 × $9,022.94 = $270.69. The net compensation of $9,022.94 is less than the dollar limitation, so this entire amount may be deferred into the SIMPLE.
Further questions:
Can the entire amount going into the SIMPLE be paid with one check for $9,293.63, with a breakdown written on its memo line, or are separate checks for $9,022.94 and $270.69 required? This will be a problem if a fund has a $500 minimum purchase.
Can the individual contribute an additional $5,000 to a Roth or traditional IRA, or does the maximum SIMPLE contribution bring his compensation down to $0, or to $10,000 – $9,293.63 = $706.37?
Are there any advantages for this person to a sole-employee 401(k) over the SIMPLE if he does not expect his net income from self-employment to exceed the SIMPLE dollar limitation?
Is there a minimum age or maximum age to be required to pay self-employment tax? Suppose that a child, who has no other income, makes $3,000 doing odd jobs, e.g. shoveling snow, raking leaves, babysitting, during a year. His income is less than the standard deduction, so he does not have to file a 1040 or pay income tax. Schedule SE provides that if 92.35% of his self-employment income is less than $400, then he does not have to file this schedule, which implies that if his self-employment income more than $400, then he must file Schedule SSE. Does he have to pay self-employment tax? Now consider the other end of the life cycle. A retiree’s income consists primarily of Social Security. He has a few hundred dollars in interest and dividends and makes $3,000 doing odd jobs. His modified adjusted income is low enough to keep his Social Security benefits tax-free. Does he have to pay self-employment tax?
Permalink Submitted by Denise Appleby on Tue, 2012-06-19 22:46
[quote=”[email protected]“]Is the following correct?
An individual has $10,000 in net profit from an unincorporated business, as reportable on Schedule C. He has no regular job, but has interest and dividend income. He wants to set up a SIMPLE and maximize his contribution. His self-employment tax is 13.3% of 92.35% of $10,000 = $1,228.26 (Item 5 of Schedule SE Section A). The deduction for employer-equivalent portion of self-employment tax is 57.51% of $1,228.26 = $706.37. The base for a Keogh or similar plan is $10,000 – $706.37 = $9,293.63. He, as the employer must make a 3% matching contribution, because there is no exception for owner-employees, unlike the top heavy contribution requirement for a profit sharing plan being able to be satisfies by making it only to non-key employees. The $9,293.63 must be split into net compensation, call it C, and the 3% matching contribution. Thus, C + .03C = $9,293.63, 1.03C = $9,293.63 and C= $9,293.63 ÷ 1.03 = $9,022.94. The matching contribution is equal to .03 × $9,022.94 = $270.69. The net compensation of $9,022.94 is less than the dollar limitation, so this entire amount may be deferred into the SIMPLE.
Further questions:
Can the entire amount going into the SIMPLE be paid with one check for $9,293.63, with a breakdown written on its memo line, or are separate checks for $9,022.94 and $270.69 required? This will be a problem if a fund has a $500 minimum purchase.
Can the individual contribute an additional $5,000 to a Roth or traditional IRA, or does the maximum SIMPLE contribution bring his compensation down to $0, or to $10,000 – $9,293.63 = $706.37?
Are there any advantages for this person to a sole-employee 401(k) over the SIMPLE if he does not expect his net income from self-employment to exceed the SIMPLE dollar limitation?
Is there a minimum age or maximum age to be required to pay self-employment tax? Suppose that a child, who has no other income, makes $3,000 doing odd jobs, e.g. shoveling snow, raking leaves, babysitting, during a year. His income is less than the standard deduction, so he does not have to file a 1040 or pay income tax. Schedule SE provides that if 92.35% of his self-employment income is less than $400, then he does not have to file this schedule, which implies that if his self-employment income more than $400, then he must file Schedule SSE. Does he have to pay self-employment tax? Now consider the other end of the life cycle. A retiree’s income consists primarily of Social Security. He has a few hundred dollars in interest and dividends and makes $3,000 doing odd jobs. His modified adjusted income is low enough to keep his Social Security benefits tax-free. Does he have to pay self-employment tax?[/quote]
Double check your calculations. I am getting a $9,235.00 for a SIMPLE IRA
Yes. The contribution can be sent in as one check, with instructions to break down the amount into salary deferral and matching contributions.
Yes. The individual can still contribute to an IRA.
The 401(k) allows for about $60 more in contributions. Other than that, suitability/advantage is based on facts, circumstances and the client’s retirement plans profile.
The S/E question is a tax question- outside my area of expertise
Permalink Submitted by Alan Spross on Tue, 2012-06-19 23:34
With respect to the SS tax exemptions, a tax return must be filed when net SE income exceeds $400 with the following exceptions:
1) Children under 18 working in the family business
2) Children under 18 delivering newspapers
3) Certain exemptions for clergy or church employees
There is no upper age related exemption.
Permalink Submitted by Eric H Silverman on Wed, 2012-06-20 02:44
Thanks for a quick response. I have further questions:
1. How did you get $9,235, rather than $9,294 (to the nearest dollar) as the maximum SIMPLE contribution? Where is my mistake? My post shows all my calculations.
2. How did you get “about $60 more” for a maximum 401(k) contribution?
3. Is my breakdown of the SIMPLE contribution to employer match and employee deferral method, i.e. C/1.03 = employee deferral and 3% of this amount = employer match correct?
4. If the self-employed person can also put $5,000 into a Roth or traditional IRA, then the total of his SIMPLE contribution and regular IRA contribution is more than his compensation. Is this permmissable?
5. Suppose that the self-employed person is 50 or older and is also allowed a $2,500 catch-up contribution for the SIMPLE and a $1,000 catch-up contribution for the regular IRA. I suppose that the latter is not a problem, if the answer to question 5 is “Yes.” The catch-up contribution for a 401(k) does not count towards the Section 415 limitation on addition to account. Can the 50+ year-old self-employed person “defer” $9,235 [b]+ $2,500[/b] to the SIMPLE from $10,000 in Schedule C net profits?