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Bill
Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 35 years experience providing financial advice
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Self Employed 401K. How does this appear in the paystub

Customer Question

Self Employed 401K.

How does this appear in the paystub of the Scorp owner/employee?
Submitted: 5 years ago.
Category: Tax
Expert:  CGCPA replied 5 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

 

If you are a 2% or more owner (shareholder) of an S Corp the 401(k) gets taxed for Social Security and Medicare taxes. This is to be added to the regular payroll amounts for W-2 reporting and will thus create a wages amount (for these two items) that differs from your income subject to Federal income tax.

CGCPA, CPA
Category: Tax
Satisfied Customers: 3820
Experience: over 40 years experience in tax matters
CGCPA and other Tax Specialists are ready to help you
Customer: replied 5 years ago.
How would it get added to wages? Is it not tax defferred?
Expert:  CGCPA replied 5 years ago.
It is only added to the Social Security and Medicare wages since these taxes must be paid on it at the present time. The income tax is the portion that is tax deferred as are any earnings within the 401(k). Those are taxed (for income taxes) when the money is distributed to you.
Customer: replied 5 years ago.
so assuming his annual wages is 100000 and he contributes 25% to 401 k, his social security wages is 125k??
Expert:  CGCPA replied 5 years ago.
That is correct. The annual Medicare wages will also be $125,000.
Customer: replied 5 years ago.

So end of the year in his w2 box 12 (d) will show $25000

Also will your answer be different if it is keogh profit sharing plan

Expert:  CGCPA replied 5 years ago.
That is correct. Keough does not change the answer. The ruling factor here is 2% or more shareholder.
Customer: replied 5 years ago.

Generally employer contributions to any retirement plan does not show up in the W2 of the employee.

 

Is it different because it is shareholder of an scorp?

Expert:  Bill replied 5 years ago.

It is not different for a shareholder of an S corp.

 

An employer contribution to a KEOGH plan should not be entered in box 12 with code D. That code is only for employee elective deferrals to a 401(k) plan. Employer contributions are not subject to social security/medicare taxes nor are they included on the W-2. Only employee elective deferrals are included on the form and subject to social security/medicare taxes.

 

With regards XXXXX XXXXX example of a $25,000 contribution to a 401(k), only $16,500 (for 2011) or $22,000 if age 50 or older can be considered an employee elective deferral and included on the W-2. The balance ($8,500 if $25,000 - $16,500) would have to be an employer contribution and not subject to social security/medicare taxes nor included on the W-2.

 

See page 10 - http://www.irs.gov/pub/irs-pdf/iw2w3_11.pdf

 

See page 33 - http://www.irs.gov/pub/irs-pdf/p15.pdf

 

Customer: replied 5 years ago.

Thanks this was useful.

 

My understanding is employees do not have to participate in the profit sharing plan.

 

So in the above example if the whole $25,000 contribution is made by the employer- is there a requirement to consider $16,500 as employee defferal because the employee is not making any contribution.

Expert:  Bill replied 5 years ago.

If it was only a profit sharing plan and the only contributions that were made were from the employer, then the $16,500 would not be an elective deferral.

 

Most 401(k) plans are part of a profit sharing plan so both types of contributions can be made if the profit sharing plan document includes a 401(k) provision.

Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3153
Experience: EA, CEBS - 35 years experience providing financial advice
Bill and other Tax Specialists are ready to help you
Customer: replied 5 years ago.
One more question can he contribute $16500 in addition to the employer contribution of $25000?
Expert:  Bill replied 5 years ago.
If it is a 401(k) then he could contribute $16,500 ($22,000 if age 50 or older) for 2011, or $17,000 ($22,500 if age 50 or older) for 2012. This assumes that his compensation is $100,000 for the $25,000 employer contribution limit.
Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3153
Experience: EA, CEBS - 35 years experience providing financial advice
Bill and other Tax Specialists are ready to help you