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My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

 
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dmertz
Level 15

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

For the purpose of retirement contributions, the tax code considers a sole proprietor to be both employer and employee.

Your SIMPLE IRA contribution is limited to your net earnings from self-employment.  For the purposes of a SIMPLE IRA contribution, your net earnings from self-employment are the amount shown on line 4 of short Schedule SE or line 6 of long Schedule SE.  In this case, that means that your net earnings for the purpose of a SIMPLE IRA contribution are limited to $8,128.

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10 Replies

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

A sole proprietor can elect to defer up to 100% of their income up to a maximum of $12,500 or $15,500 for those age 50 or older
Carl
Level 15

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

Also, a sole proprietorship can not, under any circumstances have an employee who is also the owner of that business. You can not and will not ever issue yourself a W-2, 1099-MISC or any other type of tax reporting document. That's be cause your sole proprietorship, which is reported on SCH C as a part of your personal tax return, is considered a disregarded entity by the IRS.

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

For an IRA contribution.  If you only have self-employment income you can only contribute up to your net profit reduced by the deduction allowed for one-half of your self-employment taxes.  See IRS publication 590 <a rel="nofollow" target="_blank" href="http://www.irs.gov/pub/irs-pdf/p590a.pdf">http://www.irs.gov/pub/irs-pdf/p590a.pdf</a>

So check 1040 line 27.  You have to deduct that amount from your Schedule C Net Profit.  That will give you the allowed contribution for the 1099Misc income.

So on a Net Profit of 8,801 you can contribute up to $8,179

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

Thank you, Carl. I believe I misspoke by calling myself an "employee." I don't issue myself any docs like W-2s or 1099-MISCs.

But am I nevertheless correct to list my employee contribution portion on line 28 of my 1040?

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

Wow, thank you Volvo Girl. I thought I'd poured over IRS doc about this I could find...but that's why you're the pro.
dmertz
Level 15

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

VolvoGirl, net earnings for the purpose of a SIMPLE IRA contribution are calculated differently.  See page 5 of IRS Pub 560.

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

Well I gave you the link for a regular IRA.  I see for a Simple IRA plan you need publication 560 <a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p560.pdf">https://www.irs.gov/pub/irs-pdf/p560.pdf</a>  I don't know exactly how that works.  I don't see about it being up to your net profit like the regular IRA.
dmertz
Level 15

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

For the purpose of retirement contributions, the tax code considers a sole proprietor to be both employer and employee.

Your SIMPLE IRA contribution is limited to your net earnings from self-employment.  For the purposes of a SIMPLE IRA contribution, your net earnings from self-employment are the amount shown on line 4 of short Schedule SE or line 6 of long Schedule SE.  In this case, that means that your net earnings for the purpose of a SIMPLE IRA contribution are limited to $8,128.

dmertz
Level 15

My sole prop has one employee (me). I usually contribute the maximum ($15,500) to my Simple IRA . This year's net profit is $8,801. Can I still contribute $15,500? EA

In looking at this again, I think that $8,128 is the maximum elective deferral.  It appears that you might also be permitted a matching contribution of 3% of compensation (compensation being equal to net earnings).  That would be $8,128 * 0.03 = $244.  Added to the $8,128 of elective deferrals, that would total $8,372.  You might want to check with your SIMPLE IRA custodian on this.

Schwab's calculator for this seems to confirm this:
<a rel="nofollow" target="_blank" href="https://client.schwab.com/secure/file/P-8689676/MKT85883.pdf">https://client.schwab.com/secure/file/...>
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