Yes, this is correct. It's 20% of the above calculation for a sole proprietor.A follow-up question -- the max SEP IRA contribution is calculated this way (as a percentage of net income less 1/2 of self-employment tax) because the LLC will be taxed as a sole proprietorship, correct?
The 25% of compensation calculation is for those paid on W2. For example, if she was an S-Corp, or if she hired W2 employees (that were SEP eligible) to work for her sole proprietorship.
Technically, it's 25% of compensation in both cases, with a sole proprietor's compensation being (NI - 1/2 SEtax). But the sole proprietor's contribution also needs to be reduced by the contribution itself (unlike a W2 employee) which leads to a recursive situation. This is because their net business income and their compensation are both in one "pot", so the contribution must be reduced so that a given dollar isn't used more than once.
The shortcut is to just use 20% of (NI - 1/2 SETax) for a sole proprietor, and 25% for W2.
You can also go through the worksheets and rate tables in Pub 560 for more details:
https://www.irs.gov/publications/p560#e ... nk10009065
Statistics: Posted by MP123 — Fri Jul 12, 2024 10:25 am — Replies 4 — Views 358