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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question:  I have a self-employed doctor client who is sponsoring a 401(k) plan for his business.  He has two other employees who are contributing to the safe harbor plan.  The doctor made $200,000 of self-employment income in 2012, and contributed $17,000 in deferrals to the 401(k) plan in that year.  How much should his matching contribution be?

Answer:  In this case, the safe harbor method would allow the employer to contribute an adjusted five percent of the doctor’s net earnings from self-employment to the doctor’s 401(k) account.

The 401(k) plan matching contribution for a self-employed person is equal to an adjusted plan contribution percentage times the individual’s net earnings from self-employment.  This formula consists of two elements:

(1) an adjusted plan contribution percentage, and

(2) net earnings from self-employment.

First, the self-employed person must determine the adjusted plan contribution percentage.  In this example the unadjusted plan contribution percentage used for W-2 employees is 5%, so the self-employed owner would use an adjusted percentage of 4.76%.  See the table below:

Rate Table for Self-Employed
Plan contribution rate as %	Self-Employed Rate as Decimal
1	.009901
2	.019608
3	.029126
4	.038462
5	.047619
6	.056604
7	.065421
8	.074074
9	.082569
10	.090909
11	.099099
12	.107143
13	.115044
14	.122807
15	.130435
16	.137931
17	.145299
18	.152542
19	.159664
20	.166667
21	.173554
22	.180328
23	.186992
24	.193548
25	.200000

Second, net earnings from self-employment are determined.  The first step in calculating net earnings is to determine net profit from self-employment.  That number may be found on

• Line 31, Schedule C (Form 1040),
• Line 3, Schedule C-EZ (Form 1040),
• Line 36, Schedule F (Form 1040), or
• Box 14 , Code A, Schedule K-1 (Form 1065).

Take net profit from self-employment and subtract the deduction for self-employment tax, taken from Line 27 on Form 1040.  The resulting number is net earnings from self-employment.  In this example, assuming the doctor’s self-employment tax for 2012 was $17,240, the net earnings from self-employment would be $200,000 minus $17,240, or $182,760.

Multiply net earnings from self-employment by the proper factor from the table to determine the pension contribution for the self-employed client.  In this case that would be $182,760 times 4.76 percent, or a contribution of $8,699.

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