SEP - IRA
Sole prop – based off of 20% of adjusted gross income (From Schedule C, C-EZ, or K-1)
Partnership – owner is 20% of adjusted gross income (K1)
Employees of the partnership – 25% of W-2 wages
S – Corp Owners AND employees – 25% based off of W-2 wages
To calculate your SEP contribution limit for self-employment, first determine your adjusted net earnings. These are equal to the business revenues minus all deductible business expenses. Net earnings must be adjusted by subtracting one-half of your self-employment tax, meaning your combined Social Security and Medicare taxes. As of 2013, self-employment tax is 15.3 percent of net earnings, so reduce your net earnings by one-half of 15.3 percent, or 7.65 percent. The easy way to do this is to multiply net earnings by 92.35 percent.
Your SEP Limit -
You can contribute up to 20 percent of your adjusted net earnings from self-employment to a SEP IRA or the yearly dollar limit, whichever is less. Suppose your net earnings total $200,000. Subtract self employment tax - multiply by 92.35 percent to find the adjusted net earnings of $184,700. Multiply $184,700 by 20 percent to find your SEP contribution limit of $36,940.
SEPs and Salaries -
Use the self-employment method to figure your SEP contribution limit only if your business does not pay you a salary as an employee. This is the case for sole proprietorships, partnerships and some limited liability companies. If you are owner of a business such as a C or S corporation and get a salary, calculate your SEP contribution limit as an employee. The company makes the contribution on your behalf, up to the annual dollar limit or 25 percent of your salary. For example, if you are paid $160,000 a year, the business can add up to $40,000 to your SEP
S Corporations: Contributions made for S Corp employees are deductible on Form 1120-S, Line 17. Unlike partners, an S Corp shareholder is considered an employee and must receive reasonable W-2 wages. As such, contributions to the shareholder retirement plan are based on W-2 wages, not their share of the income on the K-1. Contributions deducted on Line 17 include contributions not already being deducted as wages. This includes employer matching, safe harbor contributions, and SEP IRA contributions. Deferred compensation contributions are included in employees’ income for FICA purposes and are deducted by the S Corporation as wages.
Solo – 401k
Self employed elective deferral up to the limits of $19,000 (W-2 wages for an S-Corp, not k-1 draw) PLUS 20% of net adjusted earnings 56K total.
With a Solo 401(k), depending on your salary and age, you could contribute $56,000 per year or $62,000 for those 50 or older in 2019.
Contributions to a Solo 401(k) consist of two types
Type 1
Elective Deferral (401k) also known as Employee Contributions. The maximum elective deferral is $19,000 in 2019, or $25,000 if age 50 or older.
Type 2
Profit sharing also known as Employer Contribution.
The total amounts cannot exceed $55,000 for 2018. For 2019, this amount cannot exceed $56,000.
If your business type is a Corporation, the maximum profit sharing contribution is 25% of gross income and still subject to the above profit sharing amounts.
If your business type is a Sole Proprietor/Partnership (owner), the maximum profit sharing contribution is 20% of net income and still subject to the above profit sharing amounts.
*IMPORTANT
If you decide to take the full $19,000 for the elective deferral (Type 1), you are limited to making $37,000 in profit-sharing contributions (Type 2) so that your contributions do not exceed $56,000 for 2019.
When must a solo 401k be established -An employer operating the plan on a calendar-year basis must complete the plan documentation no later than December 31st - This essentially means that you simply need to sigh the solo 401k documents by December 31, 2019 so that you can wait until next year to both open the solo 401k bank account and make both annual solo 401k contribution types (employee and employer).
401(k) Plan Contributions
If you are a common-law employee of the S corporation:
you can make salary deferral contributions to the 401(k) plan based on your Form W-2 compensation; and
your employer can make matching or non-elective contributions to the plan based on your Form W-2 compensation as a common-law employee.
Salary deferral and employer contributions (matching and non-elective) are based on annual limits subject to cost-of-living adjustments.