Solo 401k: Calculating My Solo 401k contributions for a Sole Proprietor

Sole Proprietor Solo 401k Calculation
Once the net profits have been calculated on the Schedule C, and the SE tax figures have been determined (or estimated in the case of advance planning), the maximum Solo 401k contribution may be determined as follows.

Step 1:
Determine compensation

a. net profits – 1/2 SE tax = pre-profit sharing deduction compensation

b. pre-profit sharing deduction compensation = compensation
1 + contribution rate expressed as a decimal
(.25 is the maximum)

Step 2: Determine maximum profit sharing contribution
maximum profit sharing contribution = .25 x compensation

Step 3: Determine maximum salary deferral
maximum salary deferral = lesser of $18,500, or
compensation-maximum profit sharing contribution

Step 4: 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 2018 may not exceed $55,000 (unless your age 50 or older and therefore qualify for an additional $6,000 of catch-up contributions)

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

More Information

The process of making the annual solo 4o1k contribution for a sole-proprietorship/independent contractor business:

  1. Make the contribution by your filing + extension due date for a given tax year. Therefore, for 2018 you have until April 15, 2019 or October 15, 2019  if tax return extension is filed to make the 2018 solo 401k annual contribution. CLICK HERE for more on this.
  2. Make sure the annual solo 401k contribution falls within the Pub 560 limits. Depending on your salary and age, you could contribute $55,000 per year or $61,000 for those 50 or older in 2018.
  3. To make the contribution, write a check made payable in the name of the solo 401(k) trust, and write “Solo 401k annual contribution” on the memo section of the check.
  4. Deposit the check into the solo 401k bank/brokerage account.
  5. Fill out the annual contribution form (https://www.mysolo401k.net/wp-content/uploads/2014/09/Solo_401k_Annual_Contribution_Form.pdf) and keep a copy for the trust’s documentation purposes.
  6. After calculating my allowable deduction for the solo 401k contributions, report the deduction on Form 1040 line 28 of your personal tax return. Only report your pretax solo 401k contributions on line 28, as Roth solo 401k contributions and after-tax (voluntary contributions) do not get reported on Form 1040 because these do not reduce your taxable income.

Contribute More than You Make QUESTION:

Is there a limit on my contributions to the Solo 401k as it relates to the self-employed income I earn?  For example, if I earn $10,000 per year in 1099 income in 2018, can I contribute $18,500 to the Solo 401k?  What are the rules?

ANSWER:

Quick answer is no you could not contribute the full $18,500 based on the employee contribution limit for 2018 because you only generated $10,000 of 1099-MISC self-employment income. In order to contribute the full $18,500 of employee contributions you will need to generate approximately $20,000 of Schedule C, line 31 income.
Bottom line, when we are talking about Schedule C self-employment income, the solo 41k salary deferral (employee) contributions allow the self-employed business owner to defer 100 percent of compensation (line 31 of Schedule C minus one-half of self-employment income tax)  up to $18,500 for 2018 (IRC Sec. 402(g)). In addition, catch-up contributions can be made if the business owner/participant attains age 50 before the close of the solo 401k plan year. The catch-up contribution limit is $6,500 for 2018 (IRC Sec. 414(v)).
To determine your solo 401k contribution amount for 2018 and based on $10,000 of 1099-MISC self-employment income, you would need to insert this amount into schedule C, then deduct any business expenses. Subsequently, you would insert the line 31 figure into our solo 401k on-line contribution calculator which would result in the follow contribution figure assuming the line 31 figure remained at $10,000 after accounting for any business expenses. $9,293.52

 

 

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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