Example
You are a sole proprietor with no employees. The terms of your plan provide that you contribute 8½% (.085) of your compensation (defined earlier) to your plan. Your net profit from line 31, Schedule C (Form 1040) is $200,000. You have no elective deferrals or catch-up contributions. Your self-employment tax deduction on line 29 of Form 1040 is $7,942. You figure your self-employed rate and maximum deduction for employer contributions you made for yourself as shown in illustrated Worksheet 3-A and Worksheet 3-B.
Worksheet 3-A. Rate Worksheet for Self-Employed - Illustrated
| 1) |
Plan contribution rate as a decimal (for example, 10½% = .105) |
0.085 |
| 2) |
Rate in line 1 plus 1 (for example, .105 + 1 = 1.105) |
1.085 |
| 3) |
Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) |
0.078 |
Worksheet 3-B. Deduction Worksheet for Self-Employed -
Illustrated
| Step 1 |
| Enter your net profit from
line 31, Schedule C (Form 1040); line 3, Schedule C-EZ
(Form 1040); line 36, Schedule F (Form 1040); or line
15a*, Schedule K-1 (Form 1065) |
$200,000 |
| *General partners should reduce
this amount by the same additional expenses subtracted
from line 15a to determine the amount on line 1 or 2 of
Schedule SE |
| Step 2 |
| Enter your deduction for self-employment
tax from line 29, Form 1040 |
7,942 |
| Step 3 |
| Net earnings from self-employment.
Subtract step 2 from step 1 |
192,058 |
| Step 4 |
| Enter your rate from Worksheet
3-A |
0.078 |
| Step 5 |
| Multiply step 3 by step 4 |
14,981 |
| Step 6 |
| Multiply $200,000 by your
plan contribution rate (not the reduced rate) |
17,000 |
| Step 7 |
| Enter the smaller of
step 5 or step 6 |
14,981 |
| Step 8 |
| Contribution dollar limit |
$40,000 |
| ·If you made any
elective deferrals, go to step 9. |
| ·Otherwise, skip
steps 9 through 18 and enter the smaller of step 7 or
step 8 on step 19. |
| Step 9 |
| Enter your allowable elective
deferrals made during 2002. Do not enter more than $11,000 |
|
| Step 10 |
| Subtract step 9 from step
8 |
|
| Step 11 |
| Subtract step 9 from step
3 |
|
| Step 12 |
| Enter one-half of step 11 |
|
| Step 13 |
| Enter the smallest
of step 7, 10, or 12 |
|
| Step 14 |
| Subtract step 13 from step
3 |
|
| Step 15 |
| Enter the smaller of
step 9 or step 14 |
|
| · If you made catch-up
contributions, go to step 16. |
| · Otherwise, skip
steps 16 through 18 and go to step 19. |
| Step 16 |
| Subtract step 15 from step
14 |
|
| Step 17 |
| Enter your catch-up contributions,
if any. Do not enter more than $1,000 |
|
| Step 18 |
| Enter the smaller of
step 16 or step 17 |
|
| Step 19 |
| Add steps 13, 15, and 18.
This is your maximum deductible contribution |
$14,981 |
| Next: Enter your deduction
on line 31, Form 1040. |
When to make contributions. To take a deduction for contributions for a particular year, you must make the contributions not later than the due date (generally April 15 for calendar year taxpayers), plus extensions, of your tax return for that year.
More information. See Publication 560 for more information on retirement plans for small business owners, including the self-employed. Publication 560 also discusses the reporting forms that must be filed for these plans.
Individual Retirement Arrangement (IRA)
An individual retirement arrangement (IRA) is a personal savings plan that allows you to set aside money for your retirement. You may be able to deduct your contributions, depending on the type of IRA and your circumstances. Generally, amounts in an IRA, including earnings and gains, are not taxed until they are distributed. In certain cases, your earnings and gains may not be taxed at all if they are distributed according to the rules. For more information on IRAs, see Publication 590.
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