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I am a W-2 employee with income of more than Social security maximum. I am also doing some work for my brothers company, and will be paid for the work delivered. So I guess for me it will be selfemployment income. In a nutshell, what will be my tax liabilities for that at the end of the year?
What are the reporting responsibilities my brothers company will have for the money paid to me?

This year I will put about 5K into company's 401K. Can I set up a SIMPLE IRA for myself, and put some money into it? How much?

Any answers will be appreciated.
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As a self-employed contractor, you will record revenues & expenses on Schedule C. You will pay regular income taxes upon profit, as well as self-employment tax (social security) via Schedule SE. The self-employment tax is 15.3% of your profit. If you are going to make a substantial amount via your brother, consider making estimated payments to ease the year-end burden and avoid potential underwithholding penalties.

If you make $600 or more from your brother, he will need to file a 1099-Misc and 1096 at the end of the year.

Surprisingly enough, the IRS has a pretty good web site at www.irs.ustreas.gov/prod/cover.html. Check it out and download related publications for reference.

Don't know shinola about SIMPLEs...if you're contemplating going to that much trouble, buy an hour or two of a good tax CPA's time.
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This year I will put about 5K into company's 401K. Can I set up a SIMPLE IRA for myself, and put some money into it? How much?

May be able to setup a SIMPLE.

The first question to ask is if you are "Common-Law Employee". If your brother has the right to "control and direct both the results of the work and the way in which it is done," then you are a common-law employee and are not self-employed and cannot setup a retirement plan.

If you are not a common-law employee you can setup a SIMPLE IRA.

Normally the maximum you can contribute to a SIMPLE IRA is $6,000 (as an employee of yourself) + a match (as employer of yourself) up to 3% of self-employment compensation (to a max of $6,000). But there is a maximum that you as an employee can contribute to all employee contribution plans. According to IRS publication 560 the limit is $10,000, although I have seen $9,500 elsewhere. Fortunately all employer contributions do NOT count toward this limit.

So if the 5K you mentioned above is your contributions only then you could contribute $5,000 to a SIMPLE as an employee and then an employer match of up to 3% of compensation or $5,000 (the amount you contributed as an employee), whichever is less.

But you have to rememeber that you will have to pay the self-employment tax on ALL of your self-employment income. There is no way to get out of paying that tax. Additionally, it is a good idea to apply all self-employment related expenses against your income to reduce your profit (and thus income and self-employment tax), but this will reduce the amount available to contribute: If you only make $4,200 in self-employment income you cannot contribute more than that to the SIMPLE.

jbw
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Thanks for all replies I received. However I don't think my questions have been answered. First, SIMPLE IRA contribution. My understanding was that 3% of income is the required minimum match, but you can match dollar-for-dollar any amount of contribution. If anyone could confirm or deny that, I will appreciate.
Second, my understnding is that if you declared more than 68400 (or 72000, not sure) of wages, you don't pay selfemployment tax, except Medicare portion. But that leads to main question - how and were SIMPLE IRA contributions deducted for a schedule C filer? Is it on a sch. C or somewhere else? Is selfemployment tax paid on a contribution portion of the income? And what is the combined limit of IRA contribution and contribution to other employers 401(k).
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Thanks for all replies I received. However I don't think my questions have been answered. First,
SIMPLE IRA contribution. My understanding was that 3% of income is the required minimum
match, but you can match dollar-for-dollar any amount of contribution. If anyone could confirm or
deny that, I will appreciate.
Second, my understnding is that if you declared more than 68400 (or 72000, not sure) of wages,
you don't pay selfemployment tax, except Medicare portion. But that leads to main question - how
and were SIMPLE IRA contributions deducted for a schedule C filer? Is it on a sch. C or
somewhere else? Is selfemployment tax paid on a contribution portion of the income? And what is
the combined limit of IRA contribution and contribution to other employers 401(k).

*****

I think...

The required minimum match for SIMPLE is 2% and the max. is 3% or $6K or total elective, whichever is less.

On schedule SE, you will find the calculations for employment taxes, and indeed, you will not pay SS beyond the $72,600 (in 1999). Medicare taxes apply to all income. Any overpayment is refunded.

As the owner, you will report the sum of employer and employee SIMPLE contributions on the front of 1040 -- not on schedule C. Instructions for Schedule C refer to this. This requires you to pay SE tax on the entire amounts (they think of everything don't they!).

PS -- If your health insurance at reg. job is NOT subsidized, you can deduct some of premiums by saying it is a plan in your self-employment business.

Vanguard has nice prototype SIMPLE documents.
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And what is
the combined limit of IRA contribution and contribution to other employers 401(k).

*****

Missed this one...

The combined limit of all ELECTIVE contributions to employer plans is $10K in 1999. This includes SIMPLE, SEP, 401(K), etc.

The $2K personal IRA contribution is separate.

PS -- I believe a Keough Money Purchase Pension Plan is considered non-elective. But it is a hassle to administer.
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My understanding was that 3% of income is the required minimum match, but you can match dollar-for-dollar any amount of contribution.

NO this is not correct. The employer must match according to the one of the following formulas

a) contribute 2% of the employee's compensation (even if more than the employee's contribution) to a max of $6,000.

b) contribute a match, dollar-for-dollar, UP TO 3% of employee's compensation to a max of $6,000.

But that leads to main question - how and were SIMPLE IRA contributions deducted for a schedule C filer? Is it on a sch. C or somewhere else?

It is on the 1040.


Is selfemployment tax paid on a contribution portion of the income?

The SE tax is paid on both the employee contribution and employer contributions that go to the employer.

And what is the combined limit of IRA contribution and contribution to other employers 401(k).

As per my previous post the total amount you are allowed to contribute is $10,000 total to all employee funded programs, $8,000 if you participate in a gov't/non-profit defered comp program.

jbw
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<<According to IRS publication 560 the limit is $10,000, although I have seen $9,500 elsewhere. >>


Zorloc,
This is a reference to the same part of the Internal Revenue Code. The 402(g) limit was raised from $9,500 to $10,000 as a cost of living adjustment on January 1, 1997.

*Cat
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