2

Consider a self-employed person (over 55) who wants to contribute to an IRA. His income from self employment is 8000. That is, on line 31 of his Schedule C, the number 8000 appears.

He cannot put into his IRA more than his net earnings from self-employment. Therefore he must subtract out the employer share of Social Security and Medicare tax. In this case, the amount of these taxes are: 0.0765*8000 or 612. Therefore one of the upper bounds on how much he can contribute is 8000 - 612 or 7388.

The standard limit is 6000 but since he is over 55, his limit is 7000. The amount of money he can contribute is the smaller of 7388 and 7000. Hence he can contribute 7000.

Do I have this right?

The person lives in the United States.

2
  • 1
    Actually the deductible (employer) half of SE tax is 8000*.09235*.0765=565, see schedule SE part I, thus 8000-565=7435, but that doesn't matter because 6000+1000=7000 remains lower as you say. Remember if it matters you have until the unextended filing deadline, normally April 15 but this year April 18 (19 in MA ME), to make contributions for the prior year. Jan 21, 2022 at 3:07
  • @dave_thompson_085 I like your comment. Could you post it as an answer? If you did, I could accept it and close the question.
    – Bob
    Jan 21, 2022 at 16:13

1 Answer 1

-1

ALMOST. The limit is indeed 'compensation' or the fixed amount, whichever is less.

For self-employment, the deductible 'employer half' of SE tax that is subtracted is actually 8000 * .9235 * (.124+.029)/2 = 565 as computed in schedule SE part I, giving 8000 - 565 = 7435. But this doesn't matter, because the fixed limit of 6000 + 1000 = 7000 is lower either way. (Thanks glglgl)

The fixed limit is adjusted for inflation, but only in steps of $500. It was 5500 from 2013 through 2018, so it probably won't move up again for a while.

5
  • 2
    .09235 or .9235?
    – glglgl
    Jan 26, 2022 at 9:28
  • 1
    Can you explain where the numbers come from? I can see 0.9235 on the schedule, but not the 0.0765 Jan 26, 2022 at 11:44
  • 1
    @mhoran_psprep: under the 'wage base', as 8000 is, line 6 is subject to 12.4% SS tax on line 10 and 2.9% Medicare tax on line 11, total 15.3%, and half of 15.3% is 7.65% or .0765. Since I needed to edit anyway, I have clarified. Jan 26, 2022 at 20:37
  • 1
    I would suggest including the line numbers from the form in the answer, and link to the source document. Jan 27, 2022 at 11:39
  • 1
    @mhoran_psprep: 1040 schedules can change every year, plus the HTML on the IRS website changes even when the underlying content doesn't, and I'm not willing to spend the rest of my life updating this. If I have time I'll dig up the regulation sections; those are a lot more stable, because changing them requires spending money on lawyers. Jan 28, 2022 at 4:59

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.