I have two questions:
(1) For my Self-employed 401(k) plan, if I enter 0 for Employee Contribution and 0 for catch-up contribution, what is the maximum amount I can enter for the Employer Contribution if the net business income is $178,000? I thought the limit for Employer Contribution is 0.25% of the net business income, so it would be $44,500. But TurboTax (2024) lets me enter $63,706 and does not flag an error. Not that since I have 0 for employee contribution and catch-up contribution, the total amount of $63,706 is still below the maximum allowed $69,000.
(2) Instead of the amounts in (1), if I enter $23,000 for employee contribution and $7,500 for catch-up contribution and $33,206 for employer contribution (max allowed), the total is still $63,706 (the same as in (1)). But in this case I end up paying more tax than in (1). Why? Is it because the tax deduction on employer contribution is higher than that on employee contribution?
Thank you.
"I thought the limit for Employer Contribution is 0.25% of the net business income"
That's incorrect. The maximum employer contribution for a self-employed individual is 20% of net earnings. Net earnings are net profit minus the deductible portion of self-employment taxes. The 25% base rate reduces to 20% because the employer contribution effectively reduces the net earnings on which the 25% base rate would apply. With no W-2 income where you pay Social Security and Medicare taxes that would reduce your self-employment tax, your maximum employer contribution with $178,650 of net profit is $33,206.
Your maximum elective deferral of $30,500 (including catch-up) plus the $33,206 employer contribution means a maximum contribution of $63,706. TurboTax will not flag an excess employer contribution that you enter, but it will limit the deduction to $63,706 under the assumption that $30,500 of it is actually elective deferral and not employer contribution.
"I thought the limit for Employer Contribution is 0.25% of the net business income"
That's incorrect. The maximum employer contribution for a self-employed individual is 20% of net earnings. Net earnings are net profit minus the deductible portion of self-employment taxes. The 25% base rate reduces to 20% because the employer contribution effectively reduces the net earnings on which the 25% base rate would apply. With no W-2 income where you pay Social Security and Medicare taxes that would reduce your self-employment tax, your maximum employer contribution with $178,650 of net profit is $33,206.
Your maximum elective deferral of $30,500 (including catch-up) plus the $33,206 employer contribution means a maximum contribution of $63,706. TurboTax will not flag an excess employer contribution that you enter, but it will limit the deduction to $63,706 under the assumption that $30,500 of it is actually elective deferral and not employer contribution.