CORPORATION: Calculating My Solo 401k contributions for a Corporation

For incorporated business owners, Solo 401k contributions will generally be based on the  business owner’s compensation, which is often defined as Social Security wages (as reported on IRS Form W-2). However, incorporated business owners should be sure to understand the definition of compensation within their plan documents, as the definition of compensation can vary slightly from one plan document to the next.

Solo 401k Contributions Consist of Two Components

Remember that the maximum Solo 401k contribution is comprised of two components:

  • Employer profit sharing contribution
  • Employee salary deferral contribution

Once the incorporated business owner’s compensation is determined (or estimated in the case of advance planning), the maximum Solo 401k contribution may be determined as follows, based on 2019 and 2020 limitation.

Per the w-2 instructions pre-tax elective deferrals are not included in Box 1 of the W-2 and are listed in Box 12a and enter code “D” and the “Retirement Plan” field is checked in Box 13.
***If  instead you treat the elective deferrals as Roth Solo 401k contributions, use code “AA” in box 12a of Form w-2.***
See the following IRS page for more on this: https://www.irs.gov/retirement-plans/common-errors-on-form-w2-codes-for-retirement-plans

With respect to your self-employment income earned from your S-corporation, you can contribute:

  • Employee contribution equal  $19,000 for 2019 (plus an additional $6,000 if you are 50 or older). For 2020, the employee contribution limit increased by $500 to $19,500 (plus an additional $6,500 if you are 50 or older). Note that you must have the applicable W-2 wages from your self-employed corporation to justify the solo 401k contribution amount. The contribution is based on  the amount listed in Box 1 of your w-2 from the S-corporation plus any pre-tax employee contributions not in Box 1. Note: The employee contribution limit must be reduced by any contributions made to another 401k plan (e.g. a “day job” plan). Also, you cannot contribute more than you report on the W-2. For example, if you only report $10,000 on your W-2, you cannot contribute the $19,000 allowed limit for 2019.
  • Employer contribution equal to 25% of the amount equal to Box 1 of your w-2 from the S-corporation plus any pre-tax elective deferrals not in Box 1 provided that the total sum of the contributions does not exceed the overall limit: $56,000 for 2019 (plus $6,000 catch up if you are 50 or older), or  $57,000 for 2020 plus $6,5000 if you are 50 or older.

Step 1: Determine maximum profit sharing contribution
maximum profit sharing contribution = .25 x compensation

Step 2: Determine maximum salary deferral
maximum salary deferral = lesser of $18,000, or
compensation-maximum profit sharing contribution

Step 3: Calculate maximum Solo 401(k) contribution
maximum Solo 401(k) contribution = maximum profit sharing contribution
+ maximum salary deferral

NOTE: The maximum Solo 401(k) contribution for 2019 may not exceed $56,000 (unless your age 50 or older and therefore qualify for an additional $6,000 of catch-up contributions)

Solo 401k Contribution Example for Tax Year 2019

For example, if you are under 50 years of age, not making any contributions to any other plan such as a 401k plan offered by your full-time employer, and you receive a w-2 from your S-corporation that shows $32,000 in Box 1 with $19,000 of pre-tax employee contributions not in Box 1 you can contribute the following amounts for 2019:

  • Employee Contribution: $19,000 (i.e. the lesser of $19,000 and $51,000 which is the sum of $32,000 and $19,000)
  • Employer Contriubtion: $12,750 (i.e 25% of $51,000 which is the sum of $32,000 and $19,000).

IMPORTANT COMPLIANCE NOTE: Owners of Subchapter S corporations must base their contributions on Form W-2 income and may not base Solo 401k contributions on pass-through profits.

You can use our online Solo 401k contribution calculator to determine your contribution; CLICK HERE.

Income Needed for Maximum Contribution QUESTION:

In order to maximize the full amount I can contribute to the Solo 401K yearly, what should my W2 earnings look like “at minimum”, as well as the company’s revenues?

ANSWER:

The ability to contribute to a solo 401k plan is based on your self-employment income and the specific calculation depends on how your business is taxed (e.g. sole proprietor, S-corporation, etc.).  For example, if your business is taxed as a sole proprietorship it is based on your net income as reported on Schedule C.  If your business is taxed as a S-corporation, it is based on your w-2 wages.  For example, if you are under 50 and your business is taxed as an S-corporation (and you are not making any contributions to another 401k plan such as through a day job), then you would be able to contribute $56,000 for 2019 provided that you received at least $147,000 in w-2 wages from your self-employed business.

Can both Spouses Participate in The Solo 401k Plan QUESTION:

Is there any relationship between the new solo 401k trust and my existing S-corp business, and can we transfer my and my wife’s IRA, and 401k funds to the solo 401k plan?

ANSWER:

In order to have a 401k, there must be an employer as 401k plans are for employees.  As such, in order to set up a Solo 401k you must be self-employed.  Therefore, this confirms that yes your self-employed business (i.e. S corp) will be the sponsor of the Solo 401k. As long as both you and your wife are working in the business (e.g. receiving w-2 wages from the S-corp) then you can both participate in the Solo 401k plan and rollover funds from eligible pre-existing retirement accounts which would include non-Roth IRA accounts and former employer 401k plans.

Employer Profit Sharing Deduction for S-corporation Form 1120-S QUESTION:

On a federal 1120-S, does the profit-sharing belong on Line 17 and NOT on Line 18 (fringe benefits)?

ANSWER:

For an S-corp, employer profit sharing contributions are deducted on line 17 of Form 1120-S not Line 18.

LLC Taxed as S-Corporation Contribution Deadline QUESTION:

I spoke to my financial advisor today (copied) to account for this in our planning, and we have one additional question.
My company is an LLC taxed as an S-corporation with a fiscal year ending December 31. Do after-tax contributions to the 401k (to be rolled into a Roth “mega back door roth”) have to come through payroll before Dec 31, or can these contributions be made outside of payroll before our tax filing date?

ANSWER:

Because a solo 401k plan is for owner-only business with no common-law employees, both the employee and employer contributions can be made by  the annual solo 401k contribution deadline of March 16, or September 15 if a timely tax return extension is filed. Note: March 15 falls on a Sunday in 2020; as a result, the 2019 contribution deadline is March 16, 2020.
IRS publication 560, https://www.irs.gov/publications/p560 (the publication for self-employed retirement plans including the solo 401k plan) further confirms the above contribution deadline.

See also the following chart from IRS publication 560.

What is more, because solo 401k contributions can be made by your business tax return plus timely filed business tax return extension, the contributions are not required to flow through payroll.
Lastly, the conversion of voluntary after-tax solo 401k contributions to a Roth IRA are reported in the year that the funds are actually moved from the voluntary after-tax account to the Roth IRA, and the converted funds cannot be recharacterized back to the solo 401k plan (no do over).

Employer Contribution and FICA & Medicare QUESTION:

Are employer contributions subject to FICA or Medicare Tax?

ANSWER:

In terms of tax benefits, profit-sharing plan contributions are exempt from FICA tax because the corporation, not you, makes contributions on your behalf.  See the following for more.

https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-contributions-are-retirement-plan-contributions-subject-to-withholding-for-fica-medicare-or-federal-income-tax

 

More S-Corporation Contribution Rules

The contribution limits that apply are different:

o   Roth Salary Deferrals: For a self-employed business taxed as an S corporation, for 2019 you can contribute 100% of your W-2 wages not to exceed $19,000 (or $25,000 if you’re 50 or older).  Please note that this amount is reduced by any pretax salary deferrals made to the solo 401(k) as well as any salary deferrals made to another 401(k) plan (such as a 401(k) plan provided through “day job” employer).

o   Voluntary After-tax Contributions: For a self-employed business taxed as an S corporation, you You can contribute up to the lesser of (i) 100% of your self-employment compensation (i.e. w-2 wages when your self-employed business is taxed as an S-corporation) or (ii) the overall limit ($56,000 for 2019 contributions) reduced by any pre-tax or Roth employee contributions/salary deferrals and any pre-tax employer/profit-sharing contributions made to the Solo 401k.

S-Corporation Distributor Rules

The distribution/rollover rules applied differently:

o   Roth Salary Deferrals: You generally can’t distribute (or rollover to another retirement account such as a Roth IRA) until you are 59.5.

o   Voluntary After-tax Contributions: These amounts can be distributed/rolled over at any time.

o   See more: https://www.mysolo401k.net/making-solo-401k-distributions/

  • While the gains on voluntary after-tax funds are taxable, the gains on Roth funds may grow tax-free (i.e. if you are able to satisfy the qualified Roth distribution rules – see more here: (https://www.mysolo401k.net/what-is-a-qualified-roth-solo-401k-distribution/).  Of course, if you transfer voluntary after-tax funds to a Roth sub-account the subsequent gains would grow on a tax-deferred and potentially tax-free basis.

One Solo 401k Plan for the Self-Employed Business QUESTION:

I have a number of 401k questions

2 of us own an LLC together. It is taxed as a C Corp so we each receive W2 wages.

My partner has a Solo 401k.

  1. Do I have to included in that 401k? Can I even be included in that 401k?
  2. Do I have to get a separate 401k if I want one? (I could get this from you right?)
  3. Do I have to do anything to NOT be included in their 401k?
  4. Can they have a 401k and me not be included and me not get a 401k plan for myself?
    1. Does this violate any “testing” requirements of their Solo 401k?

ANSWER:

The solo 401k plan is sponsored by the LLC, so both owner-employees can choose to participate in the solo 401k plan. If one owner employee does not participate, the other participating owner employee can still make both employee and employer contributions. Lastly, testing does not apply to owner-only plans as solo 401k plans.

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>

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