Maximum SEP-IRA Contribution for LLC + W-2 Earner

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azurik
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Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by azurik »

So I know as a single-member LLC, the maximum SEP-IRA contribution is 20% of business income (net profit - 1/2 SE tax), but how can one calculate if he/she is also a W-2 earner that has already contributed the annual max of Social Security due to W-2 income over $142,800?

Do you calculate the 1/2 SE tax by removing the SS portion and leaving just the Medicare component?
J45
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by J45 »

I do it yearly but I m not the best to provide good answers on this but I will try...

Lets say your W2 income was $200000 and Business income (w/1099) was 100000. You take 20% of 100,000 and put 20000 in SEP. Your W2 income has nothing to do with it.

By the way, max. limit for SEP this year is 25%.
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azurik
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by azurik »

J45 wrote: Wed Sep 22, 2021 12:22 pm I do it yearly but I m not the best to provide good answers on this but I will try...

Lets say your W2 income was $200000 and Business income (w/1099) was 100000. You take 20% of 100,000 and put 20000 in SEP. Your W2 income has nothing to do with it.

By the way, max. limit for SEP this year is 25%.
I believe SEP-IRA contribution is 25% if you're paying yourself a wage as an employee (e.g. S-Corp), but it's 20% when calculated as a pass-through income (LLC) and that typically W-2 income has nothing to do with it, but I wasn't sure when it comes to SEP-IRA calculation.

For example, let's say you earn W-2 wage income of $142,800 and so you have already reached your maximum Social Security contribution for the year. An individual with wages equal to or larger than $142,800 would contribute $8,853.60 to the SS program in 2021 and would be off the hook for any additional SS taxes.

I know standard deduction/itemized deductions could play into this, but for simplicity sake, we'll put that aside. Now, let's also say you made business net income via an LLC of $100,000. I don't think you need to pay SS on this as the cap is based on the individual... if I'm correct, how do you properly calculate how much you're allowed to contribute to a SEP-IRA since you need to account for 1/2 SE tax?
Bminor
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by Bminor »

azurik wrote: Wed Sep 22, 2021 12:10 pm So I know as a single-member LLC, the maximum SEP-IRA contribution is 20% of business income (net profit - 1/2 SE tax), but how can one calculate if he/she is also a W-2 earner that has already contributed the annual max of Social Security due to W-2 income over $142,800?

Do you calculate the 1/2 SE tax by removing the SS portion and leaving just the Medicare component?
Sounds like you have employment income, and side hustle income. If that is what you are asking, I've been there too.
1) Sounds like you have maxed out on the employEE component of FICA on the W-2 income job, but if your LLC income is treated as self-employment you continue to pay the employER component for that net income. Both SS AND Medicare on the employER side. There is no salary/income cap for the employER component of FICA, just the employEE component. All employEE earned income (multiple sources) is additive for the employEE FICA cap.

2) As I understand it, the SEP IRA contribution limit is expressed as 25%, but for self-employment it actually works out to roughly 20% when you file your tax returns based on the worksheet.

3) As I understand it, your SEP IRA contribution limit is generally independent of any employer-sponsored (W-2 income) plan, UNLESS it is another SEP-IRA. In other words, a SIMPLE IRA, 401(k), etc, are funded by employEE contributions and are considered to have a separate annual contribution limit from SEP-IRA contributions, which are by definition employER contributions.

Does this address your question? Hope it helps -

Bminor (signature not yet constructed ;-))
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

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Bminor
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by Bminor »

Yes - thanks for clarifying the interplay between SEP IRA and 401(k) limits - I was incorrect lumping 401(k) with IRAs in my previous post :thumbsup
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by azurik »

Bminor wrote: Wed Sep 22, 2021 12:48 pm
azurik wrote: Wed Sep 22, 2021 12:10 pm So I know as a single-member LLC, the maximum SEP-IRA contribution is 20% of business income (net profit - 1/2 SE tax), but how can one calculate if he/she is also a W-2 earner that has already contributed the annual max of Social Security due to W-2 income over $142,800?

Do you calculate the 1/2 SE tax by removing the SS portion and leaving just the Medicare component?
Sounds like you have employment income, and side hustle income. If that is what you are asking, I've been there too.
1) Sounds like you have maxed out on the employEE component of FICA on the W-2 income job, but if your LLC income is treated as self-employment you continue to pay the employER component for that net income. Both SS AND Medicare on the employER side. There is no salary/income cap for the employER component of FICA, just the employEE component. All employEE earned income (multiple sources) is additive for the employEE FICA cap.

2) As I understand it, the SEP IRA contribution limit is expressed as 25%, but for self-employment it actually works out to roughly 20% when you file your tax returns based on the worksheet.

3) As I understand it, your SEP IRA contribution limit is generally independent of any employer-sponsored (W-2 income) plan, UNLESS it is another SEP-IRA. In other words, a SIMPLE IRA, 401(k), etc, are funded by employEE contributions and are considered to have a separate annual contribution limit from SEP-IRA contributions, which are by definition employER contributions.

Does this address your question? Hope it helps -

Bminor (signature not yet constructed ;-))
Bingo! That's exactly what I was looking for. I have a employment income from a corporate job that has maxed out the SS component and income from a "side-hustle" if I can call it that (it's earning more than my corporate job). It's clear I need to calculate my SEP-IRA contribution by deducting 1/2 SE tax from it. As you stated, I'm on the hook for the employER side so that needs to be baked into the formula.

Thank you!

EDIT: Above information needs to be corrected - please read further down this thread.
Last edited by azurik on Thu Sep 23, 2021 10:47 am, edited 2 times in total.
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azurik
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by azurik »

Lee_WSP wrote: Wed Sep 22, 2021 1:04 pm The SEP and 401k share the same 58,000 dollar cap on total contributions whether it is from the employer or employee.

So, if you have already contributed to the 401k up to 19,500, then you can only contribute 58-19.5k OR up to 25% of your net earnings from self-employment (not including contributions for yourself). Whichever is smaller.

Or, put another way:
SEP plans (that are not SARSEPs) only allow employer contributions. For a self-employed individual, contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $58,000 (for 2021; $57,000 for 2020). You can calculate your plan contributions using the tables and worksheets in Publication 560.
Hi Lee,

Can you clarify on this. I thought 401k contributions form a different entity is separated and doesn't count against my self-employed SEP-IRA contributions.

I'm maxing out the $19,500 from my corporate job (W-2 income). Can I still contribute the maximum SEP-IRA amount of $58,000 from my LLC or are you saying I need to deduct that $19,500 from my corporate job?
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by Lee_WSP »

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azurik
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by azurik »

Lee_WSP wrote: Wed Sep 22, 2021 3:48 pm
azurik wrote: Wed Sep 22, 2021 3:15 pm
Lee_WSP wrote: Wed Sep 22, 2021 1:04 pm The SEP and 401k share the same 58,000 dollar cap on total contributions whether it is from the employer or employee.

So, if you have already contributed to the 401k up to 19,500, then you can only contribute 58-19.5k OR up to 25% of your net earnings from self-employment (not including contributions for yourself). Whichever is smaller.

Or, put another way:
SEP plans (that are not SARSEPs) only allow employer contributions. For a self-employed individual, contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $58,000 (for 2021; $57,000 for 2020). You can calculate your plan contributions using the tables and worksheets in Publication 560.
Hi Lee,

Can you clarify on this. I thought 401k contributions form a different entity is separated and doesn't count against my self-employed SEP-IRA contributions.

I'm maxing out the $19,500 from my corporate job (W-2 income). Can I still contribute the maximum SEP-IRA amount of $58,000 from my LLC or are you saying I need to deduct that $19,500 from my corporate job?
Every employee may only have a maximum of 58k between any combination of 401k, 403b, & SEP/Simple IRAs.

https://www.law.cornell.edu/uscode/text/26/415

https://www.irs.gov/retirement-plans/pl ... ion-limits

https://www.irs.gov/retirement-plans/co ... tributions
Respectfully, I still think I'm correct.

Per the IRS page you referenced: The IRS limit for contributions affect all of your accounts maintained by one employer (and any related employer) - this includes elective deferrals, employee contributions, employer matching and discretionary contributions and allocations of forfeitures, to your accounts, but not including catch-up contributions - may not exceed the lesser of 100% of your compensation or $58,000 for 2021.

My corporate job (W-2) is not maintained by the same or related employer as my self-employed business (LLC). Therefore, I don't believe I need to deduct my corporate 401k contributions against my LLC SEP-IRA contributions.
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by azurik »

Lee_WSP wrote: Wed Sep 22, 2021 3:48 pm
azurik wrote: Wed Sep 22, 2021 3:15 pm
Lee_WSP wrote: Wed Sep 22, 2021 1:04 pm The SEP and 401k share the same 58,000 dollar cap on total contributions whether it is from the employer or employee.

So, if you have already contributed to the 401k up to 19,500, then you can only contribute 58-19.5k OR up to 25% of your net earnings from self-employment (not including contributions for yourself). Whichever is smaller.

Or, put another way:
SEP plans (that are not SARSEPs) only allow employer contributions. For a self-employed individual, contributions are limited to 25% of your net earnings from self-employment (not including contributions for yourself), up to $58,000 (for 2021; $57,000 for 2020). You can calculate your plan contributions using the tables and worksheets in Publication 560.
Hi Lee,

Can you clarify on this. I thought 401k contributions form a different entity is separated and doesn't count against my self-employed SEP-IRA contributions.

I'm maxing out the $19,500 from my corporate job (W-2 income). Can I still contribute the maximum SEP-IRA amount of $58,000 from my LLC or are you saying I need to deduct that $19,500 from my corporate job?
Every employee may only have a maximum of 58k between any combination of 401k, 403b, & SEP/Simple IRAs.

https://www.law.cornell.edu/uscode/text/26/415

https://www.irs.gov/retirement-plans/pl ... ion-limits

https://www.irs.gov/retirement-plans/co ... tributions
I was about to reply to your latest post, but it was deleted before I had a chance to. Here's confirmation from a CPA site that clearly distinquishes between employers:

https://www.chortek.com/sep-ira-and-401 ... e-to-both/

"What if the SEP plan and the 401(k) plans are offered by two different employers?
If the SEP plan and the 401(k) plan are offered by two different employers (i.e. yourself, if self-employed, and by an unrelated business), an individual can participate in both the SEP and the 401(k) plan, up to the limits for each plan. Contributions to a SEP plan are not reduced by contributions to the 401(k) plan."
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by azurik »

Bminor wrote: Wed Sep 22, 2021 12:48 pm
azurik wrote: Wed Sep 22, 2021 12:10 pm So I know as a single-member LLC, the maximum SEP-IRA contribution is 20% of business income (net profit - 1/2 SE tax), but how can one calculate if he/she is also a W-2 earner that has already contributed the annual max of Social Security due to W-2 income over $142,800?

Do you calculate the 1/2 SE tax by removing the SS portion and leaving just the Medicare component?
Sounds like you have employment income, and side hustle income. If that is what you are asking, I've been there too.
1) Sounds like you have maxed out on the employEE component of FICA on the W-2 income job, but if your LLC income is treated as self-employment you continue to pay the employER component for that net income. Both SS AND Medicare on the employER side. There is no salary/income cap for the employER component of FICA, just the employEE component. All employEE earned income (multiple sources) is additive for the employEE FICA cap.

2) As I understand it, the SEP IRA contribution limit is expressed as 25%, but for self-employment it actually works out to roughly 20% when you file your tax returns based on the worksheet.

3) As I understand it, your SEP IRA contribution limit is generally independent of any employer-sponsored (W-2 income) plan, UNLESS it is another SEP-IRA. In other words, a SIMPLE IRA, 401(k), etc, are funded by employEE contributions and are considered to have a separate annual contribution limit from SEP-IRA contributions, which are by definition employER contributions.

Does this address your question? Hope it helps -

Bminor (signature not yet constructed ;-))
Bminor - I wanted to follow-up with you because I think this is important for others who will read this thread.

I confirmed that if you're self-employed as an LLC and have a W-2 wage, your Social Security is capped at a maximum of $142,800 of your net earnings. In other words, if your W-2 earnings are $142,800 or higher, you don't owe anything on the SS portion of your self-employment income.

You only need to pay the Medicare portion which is 2.9% of your net earnings (plus an additional 0.9% on income over $200,000 as single filing status or over $250,000 as married filing jointly).

See this SSA notice: https://www.ssa.gov/pubs/EN-05-10022.pdf
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by nolesrule »

Are you drawing a W-2 salary from self employment or are you using Schedule C?

If you are self employed and filing with a Schedule C, your self employment taxes are calculated on Schedule SE.

If you look at Schedule SE, it takes into account Social Security wages from other sources (such as W-2) for an adjusted wage cap on SE income, so if the W-2 income exceeds the wage cap then the wage cap on the SE income will be $0.

https://www.irs.gov/pub/irs-pdf/f1040sse.pdf

This is the 2020 form. You would adjust reference numbers for the 2021 SS wage cap in lines 7 and 8a instructions to run a projected calculation.

There is no separate employER portion, but rather the employEE and employER rates are combined into a single rate on Schedule SE. The entire reason for subtracting 1/2 of SE taxes is because the employer portion of the SE taxes is not considered compensation.

The Additional Medicare Tax of 0.9% is not a self employment tax. It calculated across all wage sources and reconciled on a separate form. It is withheld on a W-2 on medicare wages over $200k.
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by nolesrule »

Lee_WSP wrote: Thu Sep 23, 2021 10:56 am
You still owe the employer's portion. It never goes away. The self employment tax is unavoidable.

What would be worse is if you paid yourself a W-2 from self employment income. You do not get any overages paid back on the employee side.
You are only on the hook for the employER side of SS taxes if you are an S Corp with W-2 wages when combined wages are above the cap, as there is no mechanism for a refund of employER SS tax in this case.

You can file to get excess employEE SS tax back when you are an S-Corp with W-2 wages from multiple sources. It works the same way as if you have 2 or more regular W-2 jobs that combined exceed the wage cap. See Schedule 3 part II line 11.
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by azurik »

nolesrule wrote: Thu Sep 23, 2021 11:32 am Are you drawing a W-2 salary from self employment or are you using Schedule C?

If you are self employed and filing with a Schedule C, your self employment taxes are calculated on Schedule SE.

If you look at Schedule SE, it takes into account Social Security wages from other sources (such as W-2) for an adjusted wage cap on SE income, so if the W-2 income exceeds the wage cap then the wage cap on the SE income will be $0.

https://www.irs.gov/pub/irs-pdf/f1040sse.pdf

This is the 2020 form. You would adjust reference numbers for the 2021 SS wage cap in lines 7 and 8a instructions to run a projected calculation.

There is no separate employER portion, but rather the employEE and employER rates are combined into a single rate on Schedule SE. The entire reason for subtracting 1/2 of SE taxes is because the employer portion of the SE taxes is not considered compensation.

The Additional Medicare Tax of 0.9% is not a self employment tax. It calculated across all wage sources and reconciled on a separate form. It is withheld on a W-2 on medicare wages over $200k.
It's an LLC so the business details are reported under Schedule C/Schedule SE.

This is also what I saw and the reason I came back on here to detail it out for future readers.
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Re: Maximum SEP-IRA Contribution for LLC + W-2 Earner

Post by azurik »

Lee_WSP wrote: Thu Sep 23, 2021 10:56 am
azurik wrote: Thu Sep 23, 2021 10:44 am
...Sounds like you have employment income, and side hustle income. If that is what you are asking, I've been there too.
1) Sounds like you have maxed out on the employEE component of FICA on the W-2 income job, but if your LLC income is treated as self-employment you continue to pay the employER component for that net income. Both SS AND Medicare on the employER side. There is no salary/income cap for the employER component of FICA, just the employEE component. All employEE earned income (multiple sources) is additive for the employEE FICA cap.
Bminor - I wanted to follow-up with you because I think this is important for others who will read this thread.

I confirmed that if you're self-employed as an LLC and have a W-2 wage, your Social Security is capped at a maximum of $142,800 of your net earnings. In other words, if your W-2 earnings are $142,800 or higher, you don't owe anything on the SS portion of your self-employment income.

You only need to pay the Medicare portion which is 2.9% of your net earnings (plus an additional 0.9% on income over $200,000 as single filing status or over $250,000 as married filing jointly).

See this SSA notice: https://www.ssa.gov/pubs/EN-05-10022.pdf
You still owe the employer's portion. It never goes away. The self employment tax is unavoidable.
That's just not true. In the scenario I outlined, there is no SE tax outside of Medicare if your other other job has covered the SS maximum cap.

Electing to have a tax filing election of S-Corp is a different discussion.

I'm sure you have a lot of knowledge to share, but it would help if the responses address the questions specifically:
  • 1. Does SEP IRA from LLC and corporate W-2 401k have separate limits when the employers are two different entities = YES
  • 2. Do you need to pay SS taxes on self-employment when you have maxed out SS contributions on a different W-2 income = NO
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