Need Some Deductions for 2011?

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Updated for 2011

Qualified Plans

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Figuring a Self-Employed Person's Deductible Contributions

As a self-employed person, like your employees, you may also make before-tax contributions to a 401(k) plan.

However, determining your own deductible contribution as a self-employed person is not as straight forward as determining contributions made on behalf of employees.

To determine an employee's contribution:

Multiply the employee's compensation (e.g., wages, salary) by the contribution rate stated in the plan.
- For example, if an employee's gross pay is $20,000 and the plan rate is 10%, the contribution is $2,000 (10% x $20,000).

However, as a self-employed person you must determine:

Your correct compensation amount to be used in figuring your own deductible contribution and
Your correct contribution rate (which is not the same rate stated in the plan that is used for employees; your contribution rate will be lower).

If you're self-employed you deduct contributions for yourself on Form 1040, line 28 (tax year 2011).

Special Computation for Self-Employed Persons

Because you must determine the correct compensation to be used to figure your deductible contribution, as well as your reduced contribution rate, this requires a little adding, subtracting, and multiplying.

To figure your deductible contribution is a three-step process:

Figure your net earnings from self-employment
Figure your reduced contribution rate
Multiply your net earnings from self-employment by your reduced contribution rate to determine your deductible contribution

The following information explains the elements of the three-step process. On the next page, after the explanation is complete, an example is presented to show you how to do the computation.

STEP 1:

Figure your net earnings from self-employment.

Net earnings from self-employment equals:

Net profit on Schedule C, line 31 (or F), reduced by one-half of your self-employment tax liability, which is deducted on Form 1040, line 27 (2011).

REMINDERS:

Contributions for employees:
- Make sure you already deducted contributions you made on behalf of your employees (if any) on Schedule C, line 19 (2011) before you start figuring your own deductible contribution.
  - As an employer, you can make either matching or nonelective contributions on behalf of your employees.
Contributions for yourself:
- Remember, contributions made for yourself are NOT entered on Schedule C; deduct them on Form 1040, line 28 (2011).
Partners and LLC members (where the LLC is taxed as a partnership, which is usually the case):
- Schedule K-1 is issued annually to each partner. It reports each partner's share of partnership and LLC net income, deductions, credits, and losses.
- Like a sole proprietor, each partner or LLC member must subtract one-half of his/her self-employment tax liability from his/her share of net income reported on Schedule K-1 to determine net earnings from self-employment.
- Each LLC member and partner deducts contributions for himself/herself on Form 1040, line 28 (2011).

Qualified Plans: STEP 2 and STEP 3: Special Computation for Self-Employed Persons-Continued

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Figuring a Self-Employed Person's Deductible Contributions

Special Computation for Self-Employed Persons

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