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

Last Updated January 26, 2023

Sole Proprietor Solo 401k Calculation

For self-employed persons, compensation means “earned income” based on the individual’s Schedule C to the Form 1040, as adjusted for the deduction for one half of self-employment taxes (Schedule SE). Because of that adjustment, the self-employed will use a figure of 20% of the net business income minus one-half of the self-employment taxes to be equivalent to 25% of includible compensation. 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 / (divided by) 1.25= compensation

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 $20,500 (for 2022), 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 2022 may not exceed $61,000 (unless your age 50 or older and therefore qualify for an additional $6,500 of catch-up contributions)

The maximum Solo 401(k) contribution for 2023 may not exceed $66,000 (unless your age 50 or older and therefore qualify for an additional $7,500 of catch-up contributions)

You can use our online solo 401k contribution calculator to calculate the solo 401k contribution amount. VISIT HERE for the calulator.

2022 & 2023 Video Slides: Solo 401k Contributions Guide w/ Secure Act 2.0 Update (Sole Proprietors/1099 Contractors):

2022: The maximum Solo 401k contribution for tax year 2022 is $61,000 plus $6,500 if you are 50 or older in 2022.

2023: The maximum Solo 401k contribution for tax year 2023 is $66,000 plus $7,500 if you are 50 or older in 2023.

Solo 401k Contribution Guides-Deep Dive

Slides: 2022/2023 Solo 401kContributions Guide: Sole Proprietor/Single Member LLC/1099-NEC
Video: https://youtu.be/8onHLHcW3eQ

Mega Backdoor Roth Solo 401k Guides- Deep Dive

Slides: 2022/2023 Solo 401k Contributions Guide w/ Secure Act 2.0 Update (Sole Proprietors/1099 Contractors)
Video: https://youtube.com/live/4TiqrmxOExc

More Information

The process of making the annual solo 401k contribution for a sole-proprietorship/independent contractor business:

Make the contribution by your filing + extension due date for a given tax year. Therefore, for 2022 you have until April 17, 2023 or October 16, 2023 if tax return extension is filed to make the 2022 solo 401k annual contribution. CLICK HERE for more on this.
Make sure the annual solo 401k contribution falls within the Pub 560 limits. Depending on your salary and age, you could contribute $61,000 per year or $67,500 for those 50 or older in 2022.
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.
Deposit the check into the solo 401k bank/brokerage account.
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.
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 2023, can I contribute $22,500 to the Solo 401k? What are the rules?

ANSWER:

Quick answer is no you could not contribute the full $22,500 based on the employee contribution limit for 2023 because you only generated $10,000 of 1099-MISC self-employment income. For 2023, in order to contribute the full $22,500 of employee contributions you will need to generate approximately $24,215 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 $22,500 for 2023 (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 $7,500 for 2023 (IRC Sec. 414(v)).

To determine your solo 401k contribution amount for 2023 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. $9,294.

LLC Taxed as Sole Proprietorship QUESTION:

If the LLC that has the Solo 401K is 100% owned by myself, does it follow the “Sole proprietorship” deadlines, which is 4/15 to file an extension?

ANSWER:

Generally, yes if the self-employed business that sponsors the solo 401k has not elected S-corp. status with the IRS, the it would be taxed as a sole proprietorship. If the entity type that sponsors the solo 401k plan is an LLC taxed as a sole proprietorship, the annual solo 401k contribution deadline is April 15, or October 15 if a timely tax return extension is filed.

Deduct Profit Sharing Contributions on Schedule C QUESTION:

Can I deduct profit sharing contribution on my Schedule C?

ANSWER:

No, as they need to be deducted on line 15 of Schedule 1. See the following instructions of Form 1040.

Mega Backdoor Contributions & Conversion QUESTION:

I am a sole proprietor and am exploring making contributions and processing conversions. Does you solo 401k plan allow for voluntary after-tax contributions and conversions to Roth IRAs?

ANSWER:

You can contribute 100% of your self-employment compensation to exceed $61,000 for 2022 ($66,000 for 2023) as a voluntary after-tax contribution. If you are a sole proprietor (or single member LLC), your self-employment compensation is equal to your net income less one-half of the self employment tax. Please note that the fact that you made contributions to your day job 401k does not limit your ability to make this contribution.

2) You can then immediately transfer the after tax contribution to a Roth IRA.

3) As part of our services, we will help you determine the exact amount (once you know the exact net self-employment income which is reported on line 31 of schedule C). We will also handle the required tax reporting (e.g. issuing 1099-r to report the rollover to a Roth IRA).

Please also see the webinar we did on this topic: https://www.mysolo401k.net/mega-back-door-roth-using-solo-401k-plan/