Re: Personal 401(k) and Estimated Quarterly Tax Payments

"Jim Haselmaier" <[EMAIL PROTECTED]> wrote in message
news:[EMAIL PROTECTED]
> [I posted this in misc.taxes and the silence from the responses was
> deafening.  So I'll post it here, too.]
>
> Background:  I'm a sole proprietor with a personal 401(k).  I'd appreciate
> any help/comments about whether I'm understanding the following correctly.
> I had a 401(k) with my former employer.  So I'm trying to be sure I'm
> getting some basic concepts right.
>
> 1)  When I was with my former employer my 401(k) contribution was funded
> with "pre-tax" money.  But, even though I'm contributing to a personal
> 401(k) now, I must pay estimated quarterly tax payments on my net business
> profits; calculated PRIOR to any 401(k) contributions I make.  Or does the
> govt not really care?  (Yeah, right.....)  They just want the estimated
> payments be close to what my ultimate tax burden is?  So, for simplicity
> I'll
> use round numbers:  Lets say I've got Q3 net business profits of $30,000.
> I'd normally send in 30% or so ($9,000) for federal estimated tax and 5%
> or so ($1,500) for state estimated tax.  Lets say I want to contribute
> $8,000
> to my personal 401(k).  Can I pay 30% (federal) and 5% (state) on $22,000?
> Or MUST I pay estimated on the full net profits, then "get it back" when I
> file my return, per question 2) below?
>
> 2)  When I file next year for 2003 I will get to deduct my 401(k)
> contributions from my taxable income.  This is where I'll "get it back".
> So, if I make reasonably-sized 401(k) contributions then I should get a
> reasonably-sized refund (approximately my 401(k) contributions minus my
tax
> rate).
>
> Comments?
>
> Thanks.
>

The trick to your situation is that while your personal 401(k) contributions
reduce your income for income tax purposes it does NOT reduce your income
for self employment tax purposes.  You have to calculate your S/E tax on the
$30K but can use the $22K to calculate your income tax.  So your numbers
would result in the following:

Income for S/E tax = $30K - S/E Tax = $4,240

Income for Income tax = $30K MINUS 1/2 S/E Tax of $2120 MINUS 401(k)
contribution of $8K (ignoring itemized or standard deductions and personal
exemptions - because you did) LEAVES $19,880 subject to Federal income tax,
which equals Federal taxes at 15% of $2,982.

This makes your total Federal estimated payment $2,982 + $4,240 or $7,222.

I am ignoring your state calculation because I don' know what state you are
in and what adjustments to Federal income are necessary for your state.
However, if you can follow my example for Federal taxes you should be able
to handle the adjustments necessary to calculate your state taxes.

Good luck,
Gene E. Utterback, EA