Last Updated 10/19/2024
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Calculating Employer Contributions for a Solo 401(k) with an S Corp
The starting point in determining how much you can contribute to a Solo 401(k) plan is your self-employment compensation, because you cannot save more than you earn. What counts as your “self-employment compensation” depends on how your self-employed business is taxed.
For a self-employed business taxed as an S corporation, your self-employment compensation is equal to the W-2 wages you receive from the S corp. This begs the question – which box on the W-2 do you use to determine contributions?
Consider the following scenario to illustrate:
- Self-employed individual over 50 years old who opened a solo 401k on or before 12/31/2024
- $100,000 of W-2 wages from their S corp in 2024
- The individual contributes $30,000 as a pre-tax employee contribution to their Solo 401(k) such that their W-2 shows $70,000 in Box 1 (wages, tips, other compensation) and $30,000 in Box 12 with code AA (employee 401(k) deferral).
To calculate the compensation limit for the 25% employer contribution, you need to start with Box 1 wages of $70,000. Then add back any pre-tax employee deferrals reported in Box 12 that were excluded from taxable wages in Box 1. In this case, the $30,000 401(k) deferral is added back.
So the full compensation used to calculate the 25% limit would be $100,000.
Therefore, 25% x $100,000 = $25,000 maximum employer contribution.
In summary, for an S-corp or a C-corp you must add back any pre-tax employee elective deferrals not included and box 1 of the w-2 but instead listed in Box 12 to the taxable wages in Box 1 to determine eligible compensation for the 25% calculation.
This allows up to 25% of full earnings to be contributed by the employer (provided that the sum of Solo 401k contributions including employee, employer and/or after-tax don’t exceed the lesser of w-2 wages or the overall limit).
