FICA TAX Question (EMPLOYEE and EMPLOYER/EMPLOYEE SIDE BUSINESS)

[Zach P.]

I'm hoping a tax expert can answer this question I have. 

In my current job, I make close to the fica cap which my employer pays both employer and my portion as the employee. I only contribute the matching 5% to my 401k which is around $6,645.00 bc it's a guaranteed 100% return. My reasons for not wanting to invest any more than the matching is due to the very limited control i have.

I want to open a side business due to the extra income I am already making. From my research so far, I've determined an LLC taxed as an s corp appears to be the best option. I also want a Solo 401k and plan to pay myself $150,000 so that I contribute 25% of my salary as the employer which is $37,500. Then I'd like to make the rest of my own contribution as employee of ($19,500-$6645) = $12,855 to equal the maximum allowable of $57,000 (37500+12855+6645) If this is how this works...I'm assuming 57k is max across everything...

My question is, since my main job has already payed both the employer and employee portion of the social security tax, will I only have to pay medicare taxes on my 2nd business? The potential tax savings I'm calculating after solo 401k deductions appears to be enormous versus not opening the business at all and I can't help but wonder if I am missing something? Are my assumptions correct on the solo 401k how everything is calculated? Thank you

Zach

[Eamonn McElroy]

@Zach P.

There is a more than a little bit of incorrect information in this thread...  Let's un-muddy the waters...

First, income from trading, like investment income, is not earned income for retirement account purposes.  This is true even if you (or a controlled entity) make a Sec 475(f) election.  For this reason, many self-employed, tax status traders do their trading through a wholly-owned corporate tax entity, either S or C (usually S), to open up retirement and health insurance planning opportunities.

Second, you should talk to your tax professional about a Sec 475(f) election, and the interplay with the QBI deduction thereunder, taking into consideration Specified Service Business Treatment and phase-out limitations.  A planning engagement with a projection might be in order.

Third, there are a few different limitations on qualified retirement plan contributions.  First, elective deferrals are aggregated across all 401(k) plans (the Sec 402(g) limit).  So, if you contribute $6,645 for the 2020 tax year to a non-equity W-2, you would be able to concurrently contribute up to $12,855 through a Solo 401(k).  Second, the "overall" limit does NOT aggregate across all 401(k) plans unless we have common control (the Sec 402(c) limit).  Your non-equity employer's 401(k) plan and a Solo 401(k) would NOT be aggregated under Sec 402(c).  Therefore, you could contribute up to $57k at the non-equity W-2 (allowable employee deferral plus employer match) AND up to $57k in your Solo 401(k) (allowable employee deferral plus employer contribution).  Of course, contributions will be limited by earned income.

Your tax situation is complex enough to warrant onboarding a tax professional as a permanent external partner on your team.