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
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.