While different types of business entities may sponsor a self-directed solo 401k plan provided the business does not employs non-owner full-time employees, the most common type of entity that sponsors a solo 401k is an S-corporation or an LLC taxed as an S-corp.
An S-corporation is a popular self-employed business for owner-only employees because profits are “passed through” (taxed) to the owner(s) at the individual level. Profits taxed proportionate to ownership interest (whether or not distributed). S corporation status is a tax election affecting only how a corporation is taxed. Also, the business liability is separate from the shareholders liability. The business owner(s) are also treated as employees for solo 401k plan purposes.
Deduction for contributions made on behalf of the owner-only employee is taken at corporate level on IRS Form 1120S, line 17 “pension, profit sharing, etc., plans.” Visit here for more information.
Only W-2 Wages Qualify
While shareholders in an S-corporation have 2 (two) forms of income (W-2 and pass-through dividends listed on the K-1, only W-2 compensation counts for making solo 401k contributions. Therefore, pass-through income is not considered compensation for qualifying for a solo 401k or for making solo 401k contributions. For more on this rule, see IRS Fact Sheet 2008-25 and Durando v. U.S., CA-9, 11/16/95. Compensation for an S-corporation or an LLC taxed as an S-corporation is reported on Form W-2 which in turn is used to calculate both employee and employer solo 401k plan contributions.
Combined, you can defer up to 100% of your salary and the S-corp can contribute 25% of your salary (W-2 wages) as an employer profit sharing contribution up to the maximum solo 401(k) contribution limit (for the limits, click here.)
Calculating Employer Contributions
The employer profit sharing contribution is based on $150,000 as the $27,000 reported in box 12 but not included in box 1 count towards calculating the 25% employer profit sharing contribution. Therefore, your profit sharing amount would be $37,500 ( .25 X 150,000). You may also use our calculator. https://www.
