Expert: Allen - 3/24/2010

Question
In 2009, I set up a 401k Profit Sharing Plan for a 1 person law firm.  

Her $105,058 salary is the amount on Line 31 Net profit or (loss) of the 2009 Schedule C.  The profit sharing contribution is $19,527.18, which is 25% of $97,635.89 (after taking into considering the self employment tax)

Her total 2009 401k PS contribution will be $36,027.18:

401k = $16,500.00
PS =   $19,527.18

Her accountant asked me kind of a strange question:  Is there an order as to what you deduct first?  In other words do you deduct the Profit Sharing Contribution from the $105k first and then the 401k?  Or doesn't it really matter since its a 1-person plan?

I always thought the PS contribution came right off the top (which is what I initially told the CPA) and then 401k.  Since she's a sole proprietor, she's contributing the whole amount by April 15th.  The CPA had me convinced that 401k came off first and then PS.  In the end, I don't think it really matters - there's no W2, etc.

For some reason this really confused me.  Thanks for your help.  S.

Answer
The ordering doesn't matter. The entire contribution (assuming there are no employees) is shown on page 1 of the 1040.

The 401k portion of the contribution is correct (assuming she is less than 50 years old). The profit sharing contribution is 20% of net Schedule C income - 1/2 the Self Employment Tax or $19,527. (This is the number you show. In your question you said 25%)

The actual calculation of the profit sharing contribution is 25% of net Schedule C income reduced by 1/2 the Self Employment Tax and also reduced by the profit sharing portion of the contribution (but not by the 401k portion of the contribution). Where this is confusing is that you have to subtract the profit sharing contribution and then multiply the net figure by 25%.
20% of $97,635.89 = $19,527.18
25% of $97,635.89 - $19,527.18 = 25% of $78,108.71 = $19,527.18