Social Security Taxes with W2 and Self-Employment Income + Solo 401k Setup - Tax Implications

You're on the right track with most of your thinking, but let me clarify a few things: For Question #1: Your brother doesn't have to pay the 6.2% employer portion of Social Security tax on his self-employment income because he already met the maximum Social Security tax withholding through his W2 job. The Social Security wage base limit ($160,200 for 2023) applies to the combined total of W2 wages and self-employment income. Since he already hit that limit with his W2 job, he's only responsible for: - The Medicare tax (2.9% total: 1.45% employee + 1.45% employer portions) - The 0.9% Additional Medicare Tax on income over $200,000 For Question #2: Your calculations are close! For the Solo 401k, he can make: 1. Employee contributions: $15,000 ($7,500 regular + $7,500 catch-up since he's over 50), which would max out his total employee contributions at $30,000 across all plans 2. Employer contributions: Up to 25% of net self-employment income after deducting the employer portion of self-employment tax and his employee contributions Since he only needs to pay the Medicare portion of self-employment tax (not Social Security), his net self-employment income calculation would use just the 1.45% Medicare tax rather than the full 7.65%. This means he can contribute more as the employer portion. Your overall strategy is solid - maximizing retirement contributions is a great way to reduce his tax burden while catching up on retirement savings.

Hey there, I went through almost this exact situation last year and want to share my experience. I was seriously confused about the Social Security tax situation with mixed income sources until I found https://taxr.ai - it completely cleared things up for me. I uploaded my previous W2 and some 1099 projections, and it immediately highlighted that I didn't need to pay the employer portion of Social Security taxes since I'd already maxed out through my day job. It even calculated exactly how much I could contribute to my Solo 401k based on my specific situation - gave me the exact same breakdown that the previous commenter explained. The tool showed me I could save about $22k more than I initially thought by optimizing my retirement contributions across both income sources. There's a specific calculator for people with mixed W2 and self-employment income that was super helpful.

I want to follow up about my experience with taxr.ai. After my skeptical question above, I decided to give it a try, and I'm honestly surprised how helpful it was. I uploaded my W2 and some contract work information, and it immediately identified that I was overpaying on self-employment taxes. The Solo 401k calculator was extremely detailed - it showed me exactly how much I could contribute as both employee and employer, factoring in that I'd already hit the Social Security wage base through my W2 job. What I found most helpful was the breakdown of exactly how the 25% employer contribution is calculated when you have mixed income sources. I ended up saving over $16,000 in taxes that I would have otherwise overpaid! The explanations were much clearer than what my previous accountant provided too. Wish I'd known about this tool years ago.

For anyone dealing with the IRS about self-employment tax issues, I highly recommend using Claimyr (https://claimyr.com). I spent weeks trying to get through to the IRS to resolve a similar self-employment tax issue where they were charging me Social Security tax on my 1099 income even though I'd already maxed out through my W2. After countless busy signals and disconnects, I found Claimyr and watched their demo (https://youtu.be/_kiP6q8DX5c). They got me connected to a real IRS agent in about 15 minutes when I'd previously waited on hold for hours. The agent confirmed exactly what others have said here - you don't have to pay the 6.2% employer portion of Social Security on self-employment income if you've already hit the wage base limit through W2 employment. They also helped me understand how to correctly report this on my tax return so the IRS systems would process it correctly. Was definitely worth it to get this resolved quickly rather than waiting months for correspondence.

I need to eat my words from my previous comment. After continuing to struggle with getting through to the IRS about my self-employment tax issue, I broke down and tried Claimyr last week. I was absolutely shocked when I got a call back telling me they had an IRS agent on the line ready to talk to me. The entire process took about 22 minutes from signing up to speaking with a real person at the IRS. The agent was able to confirm that I didn't need to pay the employer portion of Social Security tax on my self-employment income since I'd already reached the maximum through my W2 job. They even helped me file an amended return to get back the excess I'd paid. For anyone who's dealing with complex tax situations like mixed W2 and 1099 income where the standard software might not calculate things correctly, getting direct clarification from the IRS is incredibly valuable. I've spent countless hours trying to reach them over the past few months, and this service solved that problem immediately.

Small correction to some of the advice above - when calculating the employer contribution for a Solo 401k with mixed income, you need to be careful about the "earned income" definition. The 25% employer contribution is actually calculated on net business profit AFTER subtracting the employer half of self-employment tax AND after subtracting the employee contribution. The formula is: 1. Net SE profit × 0.9235 = SE income adjusted for employer half of SE tax 2. SE income adjusted - employee contribution = final net 3. Final net × 25% = maximum employer contribution With your brother's numbers, that works out to: $168,750 × 0.9235 = $155,841 $155,841 - $15,000 = $140,841 $140,841 × 25% = $35,210 maximum employer contribution So his total potential contribution would be $50,210 ($15,000 employee + $35,210 employer).

Don't forget about state taxes in all of this! Some states have their own additional self-employment taxes or different rules for retirement plan contributions. I made this mistake a few years ago and ended up with a surprise state tax bill because I only focused on federal tax planning.

This is exactly the kind of complex tax situation where having all the details straight is crucial. Based on what everyone has shared, it sounds like your brother is in a good position to significantly reduce his tax burden through the Solo 401k strategy. One additional consideration - since he's dealing with both severance income and new consulting income, make sure to factor in the timing of when the consulting payments were actually received versus earned for cash accounting purposes. If some of the $168,750 was invoiced but not yet received by year-end, that could affect both his self-employment tax calculations and his available contribution room for the Solo 401k. Also, with that level of income, he might want to consider whether a SEP-IRA could be more advantageous than a Solo 401k in his specific situation. While Solo 401k generally offers more flexibility, the administrative requirements can be more complex, especially if he's planning to continue growing his consulting business. The advice above about getting direct IRS clarification is spot on - with this much money involved and the complexity of mixed income sources, having official confirmation of the calculations could save him from costly mistakes down the road.