Individual 401k/Solo 401k Contribution Questions
Happy Spring! We have been very excited about our Solo 401K you set up for us almost a year ago. A couple of our friends also set up their Solo 401K with your help at our recommendation.
We set up our Solo 401K for our consulting business/partnership. (On Form 1065 Schedule K-1). In addition to this business, each of us receives w-2 and/or 1099s from other sources. Can this income be counted as self-employment earnings for purposes of making Profit Sharing and Salary Deferral Contribution to our Solo 401K?
Sorry to bother you with this question. You are the most knowledgeable Solo 401K expert we know.
Andy & Andrea, Charlotte, North Carolina
Individual 401k/Solo 401k Contribution Answers
Thanks so much for your business, Andy & Andrea! We certainly appreciate your positive feedback and are happy to answer your questions as we are always here to help!
- You are correct that the starting point for making 401k contributions is self-employment income.
- For example, for a self-employed business such as your’s that is taxed as a partnership, the starting figure for calculating the annual solo 401k contribution is K-1 (Form 1065) line 14 (after deducting one-half of self-employment tax).
- You mention that you receive w-2 and/or 1099s. While income from your w-2 employer is not self-employment income that would form a basis to make contributions to your Solo 401k, if your 1099R income is for self-employment activity and is reported on Scheduled C on your taxes, this could be a basis to make Solo 401k contributions as (1) the starting figure for calculating the annual solo 401k contribution is line 31 of Schedule C (after deducting one-half of self-employment tax); and (2) you can aggregate from all sources of self-employment income (see e.g. Ernst & Young Tax Guide 2017).
- If you are participating in your w-2 employer-sponsored plan, please note that any employee contributions made by to such plan will be aggregated with any employee contributions made to the Solo 401k plan in determining whether the limit has been met.