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For sole proprietors, the figures needed to calculate
a maximum contribution under an Individual(k) plan are the sole
proprietor's net profits from IRS Form 1040, Schedule C and his
or her self-employment (SE) taxes as determined on IRS Form 1040,
Schedule SE. Recall that two components comprise the maximum Individual(k)
plan contribution: employers profit sharing contribution and an employee
salary deferral contribution. Determining eligible compensation
for the proposer of the contribution to an Individual(k) applies regardless of
the contribution type.
Once the net profit and SE tax figures are determined
(or estimated in the case of advance planning), the maximum Individual(k)
plan contribution may be determined as follows.
Step 1: Determine Modified Net Profit.*
Modified Net Profit = Net Profits - ½ SE Tax
Step 2: Determine Maximum Salary Deferral
Maximum Salary Deferral = Lesser of Annual Maximum
Deferral Limit, plus Catch-Up Contributions, if eligible** or Modified Net
Profit
Step 3: Determine Maximum Profit Sharing
Contribution.
Maximum Profit Sharing Contribution = .25 x
(Modified Net Profit / 1.25)
Step 4: Calculate Maximum Individual(k)
Contribution
Maximum Individual(k) Contribution = Maximum
Salary Deferral + Maximum Profit Sharing Contribution
Note: The maximum Individual(k) plan contribution
cannot exceed 100% of the business owner's Adjusted Net
Business Income (ANBI), ANBI = Modified Net Profit - Profit Sharing
Contribution.
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Example:
India Kay is a sole proprietor under age 50, who estimates
that she will have approximately $100,000 in net profits from
her business during 2008. India estimates that her self-employment
taxes for 2008 will be approximately $14,130. Based on this
information, India calculates her estimated maximum Individual(k)
plan contribution for 2008 as follows:
Step 1: Determine Modified Net Profit
- Modified Net Profit = $100,000 - .5($14,130)
- Modified Net Profit = $100,000 - $7,065
- Modified Net Profit = $92,935
Step 2: Determine Maximum Salary Deferral
- Maximum Salary Deferral Contribution = Lesser of
$15,500 (plus catch-up contributions, if eligible) or $92,935
- Maximum Salary Deferral Contribution = $15,500
Step 3: Determine Maximum Profit Sharing
Contribution
- Maximum Profit Sharing Contribution = .25 x ($92,935 / 1.25)
- Maximum Profit Sharing Contribution = $18,587
Step 4: Calculate Maximum Individual(k)
Plan Contribution
- Max. Individual(k) Plan Contribution = Maximum Salary Deferral
+ Maximum Profit Sharing Contribution
- Max. Individual(k) Plan Contribution = $15,500 + $18,587
- Max. Individual(k) Plan Contribution = $34,087
Based on estimated net profits for 2008
of $100,000, India could contribute up to $34,087 to an Individual(k)
plan for 2008. In addition, if India were age 50 or older in
2008, she would be eligible for an additional "catch-up"
contribution of $5,000 in the form of a salary deferral
contribution, bringing her maximum contribution amount up
to $39,087 (more than 39% of net profits).
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©2007 Ascensus, Inc., Brainerd, MN
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