Is the profit sharing contribution limited by earned income for a self employed business owner? I contributed $24,500 as an employee and $7500 as an employer.

[ClareCA]

Oh, I just figured out the difference.  It is that SE tax coming into play in Section V that gets transferred to Schedule 1.  I might have to figure out how to override that.

[ClareCA]

I think I fixed the problem by adjusting income on Part 2, line 1a.  I contacted my custodian and started the process of putting the excess amounts removed from both the employee and employer contributions.  They are going to put the excess employer contributions in a suspense account.  I think that, since I am doing this before the April 15th deadline, I won't have to file that form 5330.  My only worry is that I will be taxed this year on that income and then again next year when I receive a 2019 1099R showing the removal of the excess.  Thanks again for your help.  

[dmertz]

The problem I see with an adjustment on Part II, line 1a is that because it result in Part III, line 2c being changed, it also changes net income on Part III, line 1c.  It seems like you have to just enter whatever amount produces $4,062 for the employer contribution.  To get an employer contribution of $4,062 I see needing to enter $2,024 on Part II, line 1a, which seems a bit arbitrary, but it does work without overrides.

The excess returned will not be taxable on your 2019.  Only earnings distributed with the returned elective deferral will be taxable.

[ClareCA]

Gosh, you are good.  That makes the numbers come out perfectly on the worksheet.  Yes!  Awesome.  It's actually 1b.  I had it wrong the first time by putting it in 1a.  One more quick question then I will stop bothering you:  Do you think it is permissible to withdraw the full excess contribution amount from only the employer side, allowing me to keep the employee contributions?  In other words, the total amount of excess contributions to both about $5500.  I could remove $2000 from the employee side and $3500 from the employer side, but I think it would provide me with a better tax advantage to just remove the entire $5500 from the employer matching profit side if this is allowable.  You are my tax knight in shining armor.  Thank you.

[dmertz]

I don't think it matters whether you put it on line 1a or on line 1b, the result seems to be the same.

For your question about where the excess is, it might depend on how your custodian logged the contribution.  I mentioned earlier that when making my own contributions to an individual 401(k) (not from being a notary public) that the form on which contributions are submitted requires that I designate the amount that is elective deferral and the amount that is employer contribution.  That form is used by the custodian even for contributions to 401(k) plans that are not individual plans, so perhaps that breakdown is just for informational purposes.  I don't know that the IRS is informed of the breakdown, only the total self-employed retirement contribution that you show on Schedule 1 line 28, so it seems that you *could* consider your elective deferrals to be $24,500 and the entire excess of

$24,500 + $7,500 - $26,264 = $5,376

to be in the employer contribution, with the remaining $2,124 of employer contribution being under the $4,062 maximum permitted.

[ClareCA]

That's terrific.  Thank you so much.  My custodian does make me designate whether the contribution is for employee or employer, but the 401K Corrective Measures Form that allows me to withdraw and set aside the excess let's me choose whether to withdraw it from the employee side or the employer side or both, but they stop short of recommending one or the other and advise me to see a tax professional, and I told them I have you:-)  I do think I would like to just withdraw the contributions from the employer side.  It goes into a suspense account to carry forward to the next year.  I don't think there will be a 10% penalty as long as it is withdrawn by April 15.  I would have to make about the same net profit this year in order to be able to carry it forward, but I think it just sits there in that suspense account waiting to be used for future years.  Many thanks again for all of your time, knowledge, and assistance.  I would be positive lost if not for you.

[dmertz]

Not a tax professional, just someone with years of experience with my own retirement accounts of various types, familiarity with the tax code, IRS publications and forms, and with TurboTax.  Just trying to avoid messing up my own retirement accounts and it keeps my brain exercised.  😉

[ClareCA]

You are terrific and much appreciated.  Have a wonderful day.