How much can Greg's Cookies contribute on behalf of Greg who is over 50?

Question:

How much can Greg's Cookies contribute on behalf of Greg who is over 50 in 2022?

Answer:

Greg's Cookies can contribute a maximum of $8,190 on behalf of Greg, who is over 50 years old, in 2022.

Explanation:

To calculate the maximum contribution for Greg, we need to understand the rules for contributions to a profit-sharing plan. According to the IRS, the maximum annual contribution limit for 2022 is $61,000. However, since Greg is over 50 years old, he is eligible for catch-up contributions.

The catch-up contribution limit for individuals over 50 years old is $6,500 in 2022. Therefore, we subtract this catch-up contribution from the maximum annual contribution limit to determine the maximum contribution for Greg.

$61,000 - $6,500 = $54,500

However, we also need to consider the 15% contribution that Greg elected to make to all of Greg's Cookies employees in 2022. To calculate this contribution, we need to find 15% of the net income of Greg's Cookies.

15% of $120,000 (net income) = $18,000

Now, we subtract this contribution from the maximum contribution for Greg to find the amount that can be contributed on his behalf.

$54,500 - $18,000 = $36,500

Therefore, Greg's Cookies can contribute a maximum of $36,500 on behalf of Greg in 2022. However, we also need to take into account the self-employment taxes that Greg paid.

The self-employment tax is calculated as a percentage of the net income. In this case, Greg paid $16,000 in self-employment taxes. To calculate the self-employment tax rate, we divide the self-employment taxes paid by the net income.

$16,000 (self-employment taxes) / $120,000 (net income) = 0.1333

Therefore, the self-employment tax rate is approximately 13.33%. We need to subtract this self-employment tax rate from the maximum contribution for Greg to find the final amount that can be contributed on his behalf.

$36,500 - ($36,500 * 0.1333) = $8,190

Hence, Greg's Cookies can contribute a maximum of $8,190 on behalf of Greg, who is over 50, in 2022.