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Simple IRA - Net Earnings From SE

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    Simple IRA - Net Earnings From SE

    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?

    #2
    Read pub 560, page 10±, for examples of contribution calculation to a SIMPLE-IRA plan.

    Comment


      #3
      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."

      Comment


        #4
        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!

        Comment


          #5
          Not the same

          Originally posted by Zee
          ... 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).
          Roland Slugg
          "I do what I can."

          Comment


            #6
            Originally posted by Roland Slugg
            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.

            Comment


              #7
              Originally posted by Zee
              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.

              Comment


                #8
                Originally posted by Bees Knees
                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.

                Comment


                  #9
                  [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.

                  Comment


                    #10
                    [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

                    Comment


                      #11
                      [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.

                      Comment


                        #12
                        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.
                        Last edited by Bees Knees; 11-30-2006, 11:54 AM.

                        Comment


                          #13
                          You're right

                          I goofed. Thanks for straigtening me out.

                          Comment

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