Single S-Corp owner and solo 401(k)

[ScottW]

I might be missing something as I look at the benefits of a contribution to a solo 401(k)....

In December, the 62 year old S-Corp owner took a bonus payroll check for the max contribution to his solo 401(k) of $24.500. This increased the S-Corp expenses and lowered the income on his K-1. With a combined Fed and State tax rate of 33% he saved about $8k. OK so far.

But the 15.3% combined EE & ER SS/Med payroll taxes which have to be paid on the $24,500 equals just short of $4k. So his net savings is $4k (or about 17% of the $24,500).

If his tax rate in retirement (when he takes distributions) is greater than 17% he really doesn't have a benefit.

Am I missing something?

I know he might have a benefit via a higher SS check since he has now paid more into the system (but maybe not if this is not one of his 35 highest earning years).

[Lion]

You're double counting the 7.65% that's already included in the $24,500.

Tax savings is one reason for contributing to a retirement plan. Saving for retirement is the main reason. What are your client's goals?

[ScottW]

The gross check was for $24,500 plus the ee 7.65%.

His goal was to reduce his taxes.

[New York Enrolled Agent]

You don't seem to be taking the employer (25% of compensation) contribution to the SoloK as part of the tax reduction.

[TaxGuyBill]

But the 15.3% combined EE & ER SS/Med payroll taxes which have to be paid on the $24,500 equals just short of $4k. So his net savings is $4k (or about 17% of the $24,500)

Assuming the $24,500 is part of the "reasonable compensation" that he is required to take, the $4,000 in payroll taxes would be paid even if he did not contribute to a 401k. So that is the same either way, and you can't be subtracting that from the INCOME tax 'savings'.

For example, if he took $24,500 of payroll and bought a car, he is paying $4000 in Social Security and Medicare tax plus the $8000 of income taxes (for a total of $12,000 of taxes). If he takes $24,500 and contributes it to a 401k, he is paying $4000 in Social Security and Medicare taxes and $0 of income tax. So the 'net' savings is $8,000.