IRS Issues latest guidance on December 20,2023 regarding the treatment of employer profit sharing contributions as designated Roth contributions. Click here for the latest guidance.
SECURE Act 2.0 was signed into law on December 29, 2022 and one of the main changes applies to making Roth employer contributions to 401k plans including solo 401k plans for the self-employed.
Answer:
While the end result is that the contribution will not be taxable, the contribution will have to be reported as a deductible contribution for the year for which it is made but then will be reproted as a taxable in-pan conversion for the year in which it was deposited.
When congress passed SECURE 2.0 and promulgated the new rule surrounding the option to treat employer contributions as Roth their intention was not for the self-employed business owner to effectively double benefit by reducing the S-corp’s tax liability for employer Roth employer contributions.
Employer Pre-tax Contributions
Employer Rothsolo 401k contribution can be taken as a deduction on line 17 of the Form 1120-S.
Employee Pre-tax Contributions
Lastly, employee pretax contributions are reported on Schedule 1, line 16. Alternatively, employee pretax contributions instead may be reported in box 12 of Form W-2.
S-Corporation Deduction QUESTION
The Act does not specifically state or clarify that the employer can take deduction if the employer contribution is made on a Roth basis instead of pretax. The IRS definitely needs to provide more clarification and is expected to do so by next year. This brings up the following question in my mind: does that mean that w-2 wages have to increase to account for the employer roth contribution…so does that mean that more payroll taxes are due as well as circular because increased w2 wages means now eligible to make more employer contributions (25% of greater number ). Increasing w-2 would also be circular b/c that means now can make bigger employer contributions.
For updated guidance from the IRS dated December 20, 2023, See the following: https://www.mysolo401k.net/long-awaited-clarity-arrives-irs-releases-secure-act-2-0-employer-roth-401k-including-roth-solo-401k-designated-contribution-reporting-rules-in-notice-2024-2-section-604/>
