Question

# Ken is a self-employed architect in a small firm with four employees: himself, his office assistant,...

Ken is a self-employed architect in a small firm with four employees: himself, his office assistant, and two drafters, all of whom have worked for Ken full-time for the last four years. The office assistant earns \$32,500 per year and each drafter earns \$45,000. Ken’s net earnings from self-employment (after deducting all expenses and one-half of self-employment taxes) are \$315,000. Ken is considering whether to establish an SIMPLE plan and has a few questions.

e. If Ken is required to contribute for his employees and chooses to contribute the maximum amount, what is the maximum amount Ken can contribute for himself? (Hint: Calculate the employee amounts first.) Ignore any changes in Ken’s self-employment tax.

E. Maximum Contribution:

His office assistant will be eligible for = \$32500×25% = \$8125

His drafter will be eligible for = \$45000 × 2 × 25% = \$22500

ken's earning uses the same 25% of limitation for defined contribution plans \$49,000 x 25%, the maximum of \$245,000 that must also be reduced by the amount of his contribution. The amount of self-employed income after the contribution is \$245,000 - .25X = X, X = \$196,000. Ken would be entitled to an SEP co tribution of \$49000(196000×25%)

Ken's earnings would be reduced by \$30625 to \$284375. He is eligible to use the same 25% at his employees but his earnings are limited to \$245,000 and should also be reduced by the amount of his contribution. So the maximum amount he can contribute will be \$71094.