Simple IRA - Net Earnings From SE

[Zee]

When determining the employer contribution for a sole-proprietor Simple IRA, are net earnings after deducting 1/2 SE taxes used, or net earnings before SE tax? The examples I've found use net earnings before SE tax, but other writings seem to indicate 1/2 SE tax must be subtracted before the percentage is applied? Which is correct?

[OldJack]

Read pub 560, page 10±, for examples of contribution calculation to a SIMPLE-IRA plan.

[Bees Knees]

Pub 560

Page 10 doesn't deal with the self employment issue.

Page 5 says:

"For SIMPLE plans, net earnings from self-
employment is the amount on line 4 of Short
Schedule SE (Form 1040), Self-Employment
Tax, before subtracting any contributions made
to the SIMPLE plan for yourself."

[Zee]

It's SE earnings net of 1/2 SE tax

Schedule SE, Section A, Line 4 is labeled Net Earnings from Self-Employment, but line 4 is multiplied by .9235% which (of course) results in Net earnings from self-employment reduced by 1/2 of the SE tax. Clear as a bell, huh? Duh! I suppose if I would have looked at the SE instead of asking the question it would have saved everyone time. Why can't the IRS simply write clearer? Thanks for the input!

[Roland Slugg]

Not the same

... which (of course) results in Net earnings from self-employment reduced by 1/2 of the SE tax.

Not really. The reduction is actually more than ½ of the SE tax.

The reference Bees Knees cites above is correct, and it's also mentioned on p.9 of the same Pub, in the SIMPLE section. If you prefer a more authoritative source than an IRS Pub, please see Code §408(p)(6)(A)(ii).

[Zee]

Not really. The reduction is actually more than ½ of the SE tax.

The reference Bees Knees cites above is correct, and it's also mentioned on p.9 of the same Pub, in the SIMPLE section. If you prefer a more authoritative source than an IRS Pub, please see Code §408(p)(6)(A)(ii).

Huh? Let me see if I understand you. SE taxes are 15.3%, right? 1/2 of 15.3% is 7.65%, right? 100.0 - 7.65 = 92.35%. If net earnings from self-employment are $10000, the Simple employee contribution amount would be calculated using $9235, or net earnings reduced by 1/2 of the SE Tax times the contribution percentage.

I'm not sure I understand how the reduction is actually more than 1/2 of the SE tax, please explain. I'm missing something. In the interim, I'm going to take a look at the code and page 9 of the pub. Thanks.

[Bees Knees]

Huh? Let me see if I understand you. SE taxes are 15.3%, right? 1/2 of 15.3% is 7.65%, right? 100.0 - 7.65 = 92.35%. If net earnings from self-employment are $10000, the Simple employee contribution amount would be calculated using $9235, or net earnings reduced by 1/2 of the SE Tax times the contribution percentage.

I'm not sure I understand how the reduction is actually more than 1/2 of the SE tax, please explain. I'm missing something.

Net earnings from self-employment = $10,000

Line 4 of Schedule SE = 10,000 X .9235 = 9,235

Self employment tax = 9,235 X 15.3% = 1,413

½ SE tax = 1,413 X 50% = 707

10,000 – 707 = 9,293

9,293 is greater than 9,235

Therefore, the reduction on line 4 of Schedule SE is more than half of SE tax.

[Zee]

Net earnings from self-employment = $10,000

Line 4 of Schedule SE = 10,000 X .9235 = 9,235

Self employment tax = 9,235 X 15.3% = 1,413

½ SE tax = 1,413 X 50% = 707

10,000 – 707 = 9,293

9,293 is greater than 9,235

Therefore, the reduction on line 4 of Schedule SE is more than half of SE tax.

THANKS!! By golly...now I've got it! I'm starting to think I'm getting too old & tired of all this when I can't see something this simple and straightforward.

[Joe Btfsplk]

[QUOTE=Roland Slugg]Not really. The reduction is actually more than ½ of the SE tax.

I don't know what 'reduction' you mean. The employer's 'compensation' for SIMPLE IRA is the amount BEFORE deducting any contirbutions to the SIMPLE IRA.

Here is an example.

Profit before owners SIMPLE 10309
Employer SIMPLE conrib 3% 309
Profit after owners SIMPLE 10000
Add back Employer SIMPLE 309
Employer Compensation 10309

Amount to Sch SE 10000
92.35% 9235
half 707
Total SE tax 1413

The $ 707 is NOT more than half the SE tax aside for rounding adj.

[New York Enrolled Agent]

[QUOTE=Joe Btfsplk
I don't know what 'reduction' you mean. The employer's 'compensation' for SIMPLE IRA is the amount BEFORE deducting any contirbutions to the SIMPLE IRA.

Here is an example.

Profit before owners SIMPLE 10309


Perhaps I misread your post but Compensation for purposes of a SIMPLE IRA is the amount on line 4, Short Schedule SE.

Assuming the amount on Schedule C, line 31 - Net Profit = $10,309 (using your example), then compensation for purposes of the SIMPLE would be $9,520. ($10,309 times .9235)

The 3% match is calculated on compensation - thus the employer match = $286. ($9,520 times .03)

Total amount deductible on page 1 of Form 1040 = $9,806

[Joe Btfsplk]

[QUOTE=New York Enrolled Agent][QUOTE=Joe Btfsplk
I don't know what 'reduction' you mean. The employer's 'compensation' for SIMPLE IRA is the amount BEFORE deducting any contirbutions to the SIMPLE IRA.

Here is an example.

Profit before owners SIMPLE 10309


Perhaps I misread your post but Compensation for purposes of a SIMPLE IRA is the amount on line 4, Short Schedule SE.

Assuming the amount on Schedule C, line 31 - Net Profit = $10,309 (using your example), then compensation for purposes of the SIMPLE would be $9,520. ($10,309 times .9235)

The 3% match is calculated on compensation - thus the employer match = $286. ($9,520 times .03)

Total amount deductible on page 1 of Form 1040 = $9,806[/QUOTE]

If my interpretation is correct the 3% would be 3% of the $ 10309 ($309) and $ 309 would be decuctible on page 1 of the 1040. If you are correct, then the amount deductible on page 1 of the 1040 would be $ 286. If $ 9806 could be deducted, then it would be a deduction of almost 100% of income.

SEE PAGE 13-17 of THE TAX BOOK, fifth paragraph ,entitled "Self-employed individual"
As I read it , the Income BEFORE deducting "employer compensation" woud be 10309, the deduction (at 3%) for the employer would be $ 309 and the net profit, AFTER deducting the $ 309, would be $ 10,000 and the amount subject to SE would be 92.35% of $10,000; i.e. 92.35% of net profit.

[Bees Knees]

For a self employed individual, you don't ever deduct the employer's match of the self employed's SIMPLE on the Schedule C. So the employer's match on his or her own SIMPLE would not reduce SE earnings. The employer’s match of the self employed’s SIMPLE is only deducted on the front of the 1040. NY EA had the calculation correct.

[Joe Btfsplk]

You're right

I goofed. Thanks for straigtening me out.