Self-employed Solo 401k FAQ: How does a sole proprietor calculate the Solo 401k contribution limits?
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Solo 401k Question: What income determines my solo 401k contribution limits?
RESPONSE:
Great Question!
One of the top reasons that our clients sign up with us is the fact that a solo 401(k) plan has the highest contribution limits for any defined contribution plan available to self-employed individuals.
We are fielding questions every day from our clients with regard to determining how much they can contribute to the Solo 401k plan.
There are different factors that impact how much a Solo 401k owner can contribute to a solo 401k: including age, whether contributions are made to another plan like a day job 401k plan, self-employed compensation, etc.
For a self-employed person who reports earned self-employment income on Schedule C of Form 1040, a pre-calculation has to be run to determine self-employment compensation: specifically, self-employment compensation is equal to line 31 of Schedule C LESS one-half OF self-employment tax.
For 2024, the solo 401(k) owner can contribute 100%, dollar for dollar of their self-employment compensation up to $23,000 (plus an additional $7,500 if 50 or older) as an employee contribution (assuming that such solo 401k owner is making contributions to another plan like a day job 401k plan). In addition, the solo 401k owner can make an employer contribution equal to 20% of that same number provided that the total amount of Solo 401k contributions (including employee, employer, and/or voluntary after-tax) don’t exceed the lesser of the self-employment compensation or the overall limit (e.g. $69,000 for 2024 or $76,500 if 50 or older).
