Question

In: Accounting

Ken is a self-employed architect in a small firm with four employees: himself, his office assistant,...

Ken is a self-employed architect in a small firm with four employees: himself, his office assistant, and two drafters, all of whom have worked for Ken full-time for the last four years. The office assistant earns $40,000 per year and each drafter earns $60,000. Ken’s net earnings from self-employment (after deducting all expenses and one-half of self-employment taxes) are $330,000. Ken is considering whether to establish an SIMPLE plan and has a few questions.

Is he eligible to establish an SIMPLE plan?

Is he required to cover his employees under the plan?

If his employees must be covered, what is the maximum amount that can be contributed on their behalf?

If the employees are not covered, what is the maximum amount Ken can contribute for himself?

If Ken is required to contribute for his employees and chooses to contribute the maximum amount, what is the maximum amount Ken can contribute for himself? (Hint: Calculate the employee amounts first.) Ignore any changes in Ken’s self-employment tax.

Solutions

Expert Solution

1. Yes, he is eligible to establish a SIMPLE plan.

2. Ken is required to cover all his employees all his employees under the plan since they have worked for him at least 3 of the last 5 years and they all earned at least $600 in remuneration. This assumes that all the employees are at greater than or equal to 21 years of age.

3. The maximum amount for Ken’s employees is the lesser of $54,000 or 25%(20% for self-employed before self-employed tax deduction is included) of their earnings.

4. If employees are not covered, he is not eligible for the plan.

5. His Office Assistant would be eligible for $40,000 x 25% = $10,000.

The 2 Draftsmen would be eligible for $60,000 x 25% = $30,000

Ken’s earnings would be reduced by $40,000 to $290,000. He is eligible to use the same 25% at his employees but his earnings are limited to $245,000 and should also be reduced by the amount of his contribution. So the maximum amount Ken can contribute is

$245,000 - 25%X = X

X = 196000

Maximum contribution = 196000*25% = $49000

ekkarill92 answered 1 year ago
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