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QUESTION:
To determine self-employment compensation for purposes of voluntary after-tax Solo 401k contributions, do I need to subtract one-half of the self-employment tax or just use net income?
RESPONSE:
Great question as one of the top reasons that clients set up accounts with us is the ability to make voluntary after-tax contributions (Mega Backdoor Roth Solo 401k) contributions.
For a self-employed business taxed as a sole proprietor (i.e. with self-employment income reported on Schedule C of Form 1040), one has to first calculate self-employment compensation for all types of solo 401(k) contributions, including voluntary after-tax Solo 401k contributions.
This means that the Solo 401k owner/participant must first calculate self-employment compensation by reducing the net self-employment income reported on line 31 Schedule C by one-half of the self-employment tax.
Of this amount, 100% may be contributed as a voluntary after-tax contribution dollar for dollar all the way up to the overall limit (e.g. for 2022 is $61,000, and for 2023 is $66k) but of course reduced by any other types of Solo 401k contributions made to the plan like employee or employer contributions.
