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I am trying to figure out how much I could put into a SEP-IRA and withhold for taxes.

I am estimating my income from the W2 job to be 320,000 with deductions for North Carolina state income tax, FERS pension and 401k deductions.

I am estimating about 100,000 a year in 1099 work. I imagine I could get around 10,000 in business deductions (office space, internet, etc). So my net profit would be 90,000. My understanding is that I could deduct 20% of that 90,000 and contribute it to a SEP IRA? (Not sure how much I could do as a profit sharing solo 401k). I figure I would tax care of my social security contributions alone with my W2 job. Should I figure in deducting 25% of my monthly 1099 income to cover taxes?

So based on the above assumptions. I would look at it as 90,000 - 18000 = 72,000. 72000 * 0.25 (taxes) = 54,000. So my take home after business deductions, SEP IRA contribution and tax with holdings would be 54,000 (4500/month) for the year?

Thank you

edit:

Based on a different website I did the following calculation:

  1. 100,000 * 0.9235 * 0.153 = self employment tax
  2. taxable income is 100,000 - 12,600 (std deduction for married filed jointly) - 18000 (SEP IRA) = 64,454.66
  3. fed taxes = (64,454.66 * 35%) = 22,559.13
  4. They listed a deduction of around $4100 after this math (need to look up more on that) - but came out to $18,459.13
  5. Self employment tax + owed = 14,129.55 + 18,459.13 = $32588.68.

So I would have to make quarterly payments of that amount, or $8147.17 every 3 months?

My math look ok?

Only thing I could really see different is my Self employment tax and reducing that 15.3% down by 6.2%. In which case my taxes owed would come down to $27000 or $6750 a quarter?

Edit: forgot NC taxes ...so 5.75%, keep an additional $3706 on the side as well.

So lets assume:

8333 a month independent contractor income. I put $2800 a month away for taxes. $1500 goes into a SEP IRA. My tax hom income would be $4000 / month?

  • You've got approx. 15% self-employment tax on the net (medicare and SS), plus the income tax. Aren't you in the 33% bracket? – mkennedy Jul 16 '16 at 14:29
  • Yes, last year I would be 33% tax bracket. So should I withhold 33% + 2.9% (Medicare) + 5.75% (NC income tax). Should I withhold SS if I will be hitting the limit with my W2 that I'm not paying double into it? – AdamM Jul 16 '16 at 15:01
  • @mkennedy - SS is covered by his day job. He only has the 'employer half" of his 1099 income for SS payment due. – JoeTaxpayer Jul 16 '16 at 16:00
  • @JoeTaxpayer So how do I assume taxes going forward? 33% federal income tax bracket, 6.2% SS, 2.9% Medicare and 5.75 NC state income tax? So basically withhold 48% of each paycheck? – AdamM Jul 16 '16 at 16:43
  • @JoeTaxpayer See last part of my answer on self-employment SS. I believe his day job covers his TOTAL SS obligation, but not Medicare. – user32479 Jul 16 '16 at 21:37
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The limit on SEP IRA is 25%, not 20%. If you're self-employed (filing on Schedule C), then it's taken on net earning, which in your example would be 25% of $90,000. (https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people)

JoeTaxpayer is correct as regards the 401(k) limits. The elective deferrals are per person - That's a cap in sum across multiple plans and across both traditional and Roth if you have those. In general, it's actually across other retirement plan types too - See below.

If you're self-employed and set-up a 401(k) for your own business, the elective deferral is still aggregated with any other 401(k) plans in which you participate that year, but you can still make the employer contribution on your own plan.

This IRS page is current a pretty good one on this topic: https://www.irs.gov/retirement-plans/one-participant-401k-plans

Key quotes that are relevant:

The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

•Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:

◦$18,000 in 2015 and 2016, or $24,000 in 2015 and 2016 if age 50 or over; plus

•Employer nonelective contributions up to:

◦25% of compensation as defined by the plan, or

◦for self-employed individuals, see discussion below

It continues with this example:

The amount you can defer (including pre-tax and Roth contributions) to all your plans (not including 457(b) plans) is $18,000 in 2015 and 2016. Although a plan's terms may place lower limits on contributions, the total amount allowed under the tax law doesn’t depend on how many plans you belong to or who sponsors those plans.

EXAMPLE

Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2015. He deferred $18,000 in regular elective deferrals plus $6,000 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2015 were $36,500. This is the maximum that can be contributed to the plan for Ben for 2015.

A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year.

Notice in the example that Ben contributed more that than his elective limit in total (his was $24,000 in the example because he was old enough for the $6,000 catch-up in addition to the $18,000 that applies to everyone else). He did this by declaring an employer contribution of $12,500, which was limited by his compensation but not by any of his elective contributions.

Beyond the 401(k), keep in mind that elective contributions are capped across different types of retirement plans as well, so if you have a SEP IRA and a solo 401(k), your total contributions across those plans are also capped. That's also mentioned in the example.

Now to the extent that you're considering different types of plans, that's a whole question in itself - One that might be worth consulting a dedicated tax advisor. A few things to consider (not extensive list):

  • The 401(k) will allow you to contribute a larger amount of money at some income levels but not at others.
  • The SEP IRA is easier to set-up and easier to close
  • There are some requirements when creating a 401(k) plan that you intend for it to be a "permanent" plan. You should check those to make sure you're setting up a plan that you want. (Of course it's not absolutely permanent - but there are rules about the circumstances under which you can close it that do not apply to other types of plans.)

As for payroll / self-employment tax: Looks like you will end up paying Medicare, including the new "Additional Medicare" tax that came with the ACA, but not SS:

If you have wages, as well as self-employment earnings, the tax on your wages is paid first. But this rule only applies if your total earnings are more than $118,500. For example, if you will have $30,000 in wages and $40,000 in selfemployment income in 2016, you will pay the appropriate Social Security taxes on both your wages and business earnings. In 2016, however, if your wages are $78,000, and you have $40,700 in net earnings from a business, you don’t pay dual Social Security taxes on earnings more than $118,500. Your employer will withhold 7.65 percent in Social Security and Medicare taxes on your $78,000 in earnings. You must pay 15.3 percent in Social Security and Medicare taxes on your first $40,500 in self-employment earnings and 2.9 percent in Medicare tax on the remaining $200 in net earnings.

https://www.ssa.gov/pubs/EN-05-10022.pdf

Other good IRS resources:

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