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 2017 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 to the lesser of (i) $18,000 for 2017 or $18,500 for 2018 (or an additional $6,000 if you are 50 or older) OR (ii) the amount equal to 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).
  • 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 ($54,000 for 2017 or $55,000 for 2018 plus $6,000 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 2017 may not exceed $54,000 (unless your age 50 or older and therefore qualify for an additional $6,000 of catch-up contributions)

Solo 401k Contribution Example

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 $18,000 of pre-tax employee contributions not in Box 1 you can contribute the following amounts for 2017:

  • Employee Contribution: $18,000 (i.e. the lesser of $18,000 and $50,000 which is the sum of $32,000 and $18,000)
  • Employer Contriubtion: $12,500 (i.e 25% of $50,000 which is the sum of $32,000 and $18,000).

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 $55,000 for 2018 provided that you received at least $146,000 in w-2 wages from your self-employed business.

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 15, or September 15 if a timely tax return extension is filed.
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

 

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 18 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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