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.
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