Independent Contractor / Surpise Business Owner

[LdiJ]

He's still going to have to have a adjusted profit of $130,000 to shelter $26,000. I don't understand where the 50% is coming from.

I was assuming an income of 45k, since he stated he could only contribute 9k to a SEP IRA, and I know that a SEP IRA is maxed at 20% of net profit. Using that same figure I extrapolated the more than 50%.

I wanted him to come back and explain where he was actually getting his numbers.

 

[TaoWanderer]

Not sure what my income will be exactly, but I'm guessing around $50,000. Just put that number into Vanguar's Plan contribution calculator:

https://personal.vanguard.com/us/SbsCalculatorController?FW_Event=chgBusType&NavStep=1

and it spit out this:

SEP–IRA Contribution Amount

Simplified Employee Pension (SEP–IRA) contribution amount
If your earned income is less than the maximum earned income allowed, your earned income was multiplied by the contribution percentage. If your earned income is greater than the maximum earned income allowed, the maximum earned income allowed was multiplied by the contribution percentage.
$9,293.52
Profit-sharing plan–Keogh Contribution Amount

Profit-sharing plan (PSP-Keogh) contribution amount
If your earned income is less than the maximum earned income allowed, your earned income was multiplied by the contribution percentage. If your earned income is greater than the maximum earned income allowed, the maximum earned income allowed was multiplied by the contribution percentage.
$9,293.52
SIMPLE IRA Maximum contribution amount
SIMPLE IRA maximum employee contribution amount
The lesser of $11,500.00 or 100% of compensation. $11,500.00
SIMPLE IRA maximum employer contribution amount
The lesser of $11,500.00 or 3% of compensation (assuming the maximum employer match of 3%). $1,385.25
SIMPLE IRA maximum total contribution amount allowed $12,885.25
Individual 401(k) Maximum contribution amount
Individual 401(k) maximum total contribution amount allowed
The contribution amount is based on the income you entered and assumes the maximum allowable salary deferral, maximum allowable employer contribution, and catch-up contribution, if applicable. To determine your annual contribution, visit the IRS website or talk to your tax advisor. $25,793.52

Also when I went through their little guide to help you choose a retirement plan:

https://personal.vanguard.com/us/whatweoffer/smallbusiness/retirementplantool

it recommended an Individual 401(k), that's why I was asking. Unfortunately Vanguard doesn't allow loans from 401(k) like some institutions do.

I live rather monkishly so I save a lot and wanted to invest it.

 

[tranquility]

The number is more complex than the worksheet. Instead, see Publication 560.

 

[TaoWanderer]

The number is more complex than the worksheet. Instead, see Publication 560.

Thank you. Their estimates must be close though, right?

 

[tranquility]

Uh....why do you say that? Only when you put in the facts can you say it is reasonable. Maybe they thought you were giving yourself a W-2 or something.

 

[TaoWanderer]

Uh....why do you say that? Only when you put in the facts can you say it is reasonable. Maybe they thought you were giving yourself a W-2 or something.

Well, I put all the facts they were asking in there.

Does it matter if you get paid by W-2 vs. 1099?

If I got paid by W-2, then I wouldn't be self employed though, right?

 

[tranquility]

Well, I put all the facts they were asking in there.

Does it matter if you get paid by W-2 vs. 1099?

If I got paid by W-2, then I wouldn't be self employed though, right?

Super. Have them pay your penalties for over-contribution.

From the comments, I must assume you didn't read and/or understand the publication. You should probably see a tax professional.

 

[TaoWanderer]

Super. Have them pay your penalties for over-contribution.

From the comments, I must assume you didn't read and/or understand the publication. You should probably see a tax professional.

Sorry, I haven't got a chance to read it completely yet.

Just assumed that Vanguard wouldn't put something up like that if it was way off.

 

[tranquility]

They didn't put anything up, you put in numbers and they made some calculations. Were there any warnings on what you needed to do before acting on the number? (Maybe, see a tax professional?) And, since each type operates by looking at different numbers, it can't calculate properly unless you know the number you input is correct. Not just in fact, but under the law.