Publication 560 Deduction Wksht for SE

I believe the adjustment to the Employer Contribution rate (25% to 20%; 10% to 9.090909%) accounts for the decrease in entity/employer income due to the Employer Contribution

Reassuringly, the IRS pub mentions these adjustments (they simply don't elaborate on how they are implemented in the worksheets):

Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items

• The deduction for the deductible part of your self-employment tax.
• The deduction for contributions on your behalf to the plan.

The deduction for your own contributions and your net earnings depend on each other. [emphasis added]

they simply don't elaborate on how they are implemented in the worksheets

As makbo cited above, the sole proprietors and (partnerships) have a twist in their computation of the profit sharing component. They must reduce their net income by the contribution, before they apply the contribution rate. Some form of parity. (Both entities still have to reduce 1/2 SE tax)

For example, earnings of $100,000 and 25% contribution rate. The easiest way is to multiply a fraction of the contribution rate over 1 + the contribution rate. Contribution = 25/125 x $100,000 = $20,000.

Proof - $100,000 NI less the contribution amount of $20,000. Now you have your corrected NI and apply 25% of the $80,000 and you get $20,000

25% rate = 25/125 or 20%
20% rate =20/120 or 16.6667%
10% = 10/110 or 9.09%

The husband has already had the maximum amount contributed from his real job.

I see in Step 4 how 'we' adjust for the deduction for the "Employer" contribution, generally. But Step 12 really is the adjustment for the fact that the profit/compensation/LLC member funds available for a full Employer contribution may be dissipated due to the immensity of the Elective Deferral.

The husband has already had the maximum amount contributed from his real job.

Did the ER put in $30,500?

His ER had to contribute $30,500 to eliminate him from the LLC profit sharing contribution. As I mentioned above, and the worksheet you have referred to, the annual addition cannot exceed $55,000 ($61,000 if eligible for catch-up).

Do you agree wife can contribute $18,500 and $4,647?

Actually $18,500 and $2,367.

The $2,367 contribution drops the compensation down to $20,867.

So. . . . . the husband in this 50%-50% LLC taxed as a partnership is not participating in the 401(k) nor in the profit sharing; due to his employer at his primary job having already made $55,000 in contributions to the husband's account. Also, the husband's personal services are not a material income producing factor in the LLC so he has no self-employment income eligible for calculation purposes.

The employer contribution and the employee elective deferral are reported on Line 13 of the K-1 with a Code of R. The employer portion: is that allocated 50% - 50% between H & W or is it 100% to the W?

I am curious, since it the employer contribution is allocated among the members; then, it would seem in this case, that Step 12 would have a different calculation.

I toss the following in, wondering who the taxpayer is in 401(c )(2)(A)(v):

26 U.S. Code § 401.Qualified pension, profit-sharing, and stock bonus plans

(c)DEFINITIONS AND RULES RELATING TO SELF-EMPLOYED INDIVIDUALS AND OWNER-EMPLOYEES For purposes of this section—
(1)SELF-EMPLOYED INDIVIDUAL TREATED AS EMPLOYEE
(A)In general
The term “employee” includes, for any taxable year, an individual who is a self-employed individual for such taxable year.
(B)Self-employed individual The term “self-employed individual” means, with respect to any taxable year, an individual who has earned income (as defined in paragraph (2)) for such taxable year. To the extent provided in regulations prescribed by the Secretary, such term also includes, for any taxable year—
(i)
an individual who would be a self-employed individual within the meaning of the preceding sentence but for the fact that the trade or business carried on by such individual did not have net profits for the taxable year, and
(ii)
an individual who has been a self-employed individual within the meaning of the preceding sentence for any prior taxable year.

(2)EARNED INCOME
(A)In general The term “earned income” means the net earnings from self-employment (as defined in section 1402(a)),
but such net earnings shall be determined—
(i ) only with respect to a trade or business in which personal services of the taxpayer are a
material income-producing factor,
(ii ) without regard to paragraphs (4) and (5) of section 1402(c),
(iii) in the case of any individual who is treated as an employee under subparagraph (A), (C), or (D) of section
3121(d)(3), without regard to section 1402(c)(2),
(iv ) without regard to items which are not included in gross income for purposes of this chapter, and the deductions
properly allocable to or chargeable against such items,
(v ) with regard to the deductions allowed by section 404 to the taxpayer, and
(vi ) with regard to the deduction allowed to the taxpayer by section 164(f). (1/2 SE tax)

For purposes of this subparagraph, section 1402, as in effect for a taxable year ending on December 31, 1962, shall be treated as having been in effect for all taxable years ending before such date. For purposes of this part only (other than sections 419 and 419A), this subparagraph shall be applied as if the term “trade or business” for purposes of section 1402 included service described in section 1402(c)(6).

employer contribution is allocated among the members

ER contribution is deposited into the individual account of the eligible member. It is a memo item. So you put the info on the K-1 for the individual who deferred/received the monies. And I don't agree with your computations. You have never mentioned whether or not the members are eligible for catch-up. I am assuming there is no catch-up.

You have never mentioned whether or not the members are eligible for catch-up. I am assuming there is no catch-up.

You're right, the OP never stated that catch-up contribution was in play. Almost all the sample calcs in this thread, including both rounded and actual numbers for gross profit, correctly assumed no catch-up. It was only you who ever assumed catch-up contributions, which are an exception to this arcane calculation. That was pointed out several times.

I never assumed anything, as the last post by MWPXYZ stated $55K cap on contributions. But thanks for assuming.

Thanks for your responses - although the issue in this situation involves small amounts and the recent issue involves really small amounts, the correct answer has a material affect due to additional complexities with the clients.

Husband and wife are in their 20's, no catch-up. The each are 50% LLC members, profits, losses, capital, and anything else we can think of.

The LLC, taxed as a partnership had a $50,000 profit from a trade or business. As I note in my most recent post in an effort to exclude him from the plan, the husband's personal services are not a material income producing factor in the LLC so he has no self-employment income eligible for calculation purposes (401(c)(2)(A)(I)).

The only income eligible for calculating contributions, "employer" and "employee" is that of the wife.

Her K-1 box 1 reports $25,000

The maximum amount that can be contributed to her retirement account is $20,867. That is because the $25,000 must be reduced by the deduction under Section 164(f) [401(c)(2)(A)(vi)] AND the deduction allowed by Section 404 [401(c)(2)(A)(v)].

$25,000 less $1,766 less $2,367 results in the earned income of $20,867, the maximum contribution allowed under Section 404(a)(8)(C).

The entire contribution is reported on Line 13(R) of the K-1. In another thread someone suggested breaking out the amounts on Line 13(R) between employee/elective deferral ($18,500) and employer/discretionary $2,367).

So, unfortunately, I got to thinking: that $2,367 contribution by the employer; is it split between the husband and wife on Line 13(R) of each of the K-1s AND for calculating the earned income for each member? I realize ALL the funds goes to the wife's account. BUT, I also realize that the $2,367 is an LLC contribution under Section 404 and perhaps should be allocated amongst the LLC members.

BTW, as a mind bender, if the "employer" is allocated amongst all members: in this case the wife would have earned income of an amount slightly greater than the LLC as a whole. Since the LLC contribution as a whole is still limited to $2,367; it seems my thoughts on allocating the employer contribution amongst all the members K-1s would have no effect on the contribution amount.

I would just go with what the instructions to Schedule K-1 say:

Code R. Pensions and IRAs. Payments made on your behalf to an IRA, qualified plan, simplified employee pension (SEP), or a SIMPLE IRA plan.

Notice it says "on your behalf". This implies that the employer portion is not allocated between the two partners as would be the case with other expenses, and the calculation happens as we determined earlier in the thread.

Now, of course I don't have any statutory reasoning to support this treatment. We already analyzed one arcane issue in this thread, so in one sense it would be a shame to stop there and not also explain this one.

The issue in my example IS for small amounts and seems arcane.

I wonder if it is a small issue with larger partnerships that have integrated formulas.

In the client's case I have a husband wife LLC with no defined allocation percentages, several types of activities operated by the husband, the wife, or both; a 401(k) with the elective deferral limited to a percentage of "compensation", a percentage that is less than 100%; and a few passive losses in other LLCs.

So I have incredible latitude in determining the income for the husband and the wife which will filter into the 401(k) calculations as well as the passive income from this LLC.

I am having a blast!

I never assumed anything, as the last post by MWPXYZ stated $55K cap on contributions.

The result you posted repeatedly in #4, 7, 9, & 25 was wrong (did not match) as far as the OP scenario was concerned (even after the exact amount of net profit was provided, and even after you were informed that the OP was not including catch-up contributions).