Last Updated November 7, 2022
A solo 401k plan has become the retirement account of choice over SIMPLE IRAs and SEP IRAs for the self employed, whether employed as a sole proprietor, independent contractor, consultant, through an LLC, Partnership or Corporation entity type.
In order to take advantage of what a Solo 401k has to offer—for example, high contributions, solo 401k participant loan, option to invest in alternative investments such as real estate, precious metals (gold and silver), tax liens, trust deeds, private company shares, etc., you first need to determine if you qualify to Open a Solo 401k.
The good news is that to qualify only the two following eligibility requirements must be met:
1) Self-employment activity: part-time or full-time
2) Without any common-law, full time employees
What Constitutes Self-Employment Activity for Participating in a Solo 401k?
Whether the self employment activity is generated through an LLC, C-Corporation, S-Corporation, Limited Partnership or Sole Proprietorship, to qualify as self employment activity the business must pursue steps to be profitable–that is generate “earned income.”
Although income derived from a partnership or sole proprietorship can be earned income, pass-through income earned by a shareholder in an S corporation is not classified as earned income. Guaranteed payments made to a limited partner is treated as net earnings from self-employment if the payment is for services to the partnership.
You should not open a Solo 401k if you are not truly planning to pursue self employment income.
Generally, the term “earned income” is defined to mean the individual’s net earnings from self-employment activities in a trade or business. (IRC 402(a)). In addition, the earned income must arise from the individual’s personal services and the personal services must be a material income-producing factor. (IRC. 401(c)(2)(A)(I); Reg. §1.401-10(c)(1). Income from the disposition of certain types of property is also deemed earned income. The purpose of the earned income rules from self-employment is to provide a solo 401k plan for the self-employed so that they can save for retirement, and to exclude inactive owners whose income is derived only from investments as investment income is not considered “earned income.”
Example 1 of Self-Employment Income
John, a former Major League baseball player, enters into a services agreement with a baseball glove maker under which he grants the maker the right to use his name and signature. Also, John agrees to perform promotional services for the glove maker. The royalties he receives are “earned income” only to the extent that they represent compensation for his promotional services. The royalties derived from the use of his name and signature are not treated as earned income.
Example 2 of Self-Employment Income
Susan is a realtor and receives a 1099-MISC on an annual basis. She then files a Schedule C with her Form 1040 to report her earned income for the year.
Example 3 of Self-Employment Income
Fees received for babysitting, house cleaning and lawn cutting are all examples of taxable income, even if performed on a part-time basis for the year. Someone who repairs computers in his or her spare time is also considered to be self-employed.
Example 4 of Self-Employment Income
Linda owns multiple properties which she rents out. She actively manages them (e.g., screens potential tenants, collects rent checks, performs some of the routine property maintenance, and arranges for contractors to perform some or all of the property improvements or repairs. Lastly, Linda performs these activities continually and regularly with the intent to generate income or profit; therefore, her rental activity is a business.
What Amount of Earned Income is Required?
The IRS has not outlined the amount of revenue or profit the self-employed business must generate each year. Of course, in order to make contributions net self-employment income is required. You are not required to make annual solo 401k contributions.
You can participate in more than one qualified plan, but your contributions to all the plans cannot exceed the overall limits. For example, you can continue contributing to your day job’s 401k, establish a part-time business, subsequently open a Solo 401k for your part-time business and contribute to both 401k plans.
Full-Time Employees vs. Part-Time Employees
Even though a solo 401k is for owner-only businesses with no full-time W-2 employees, you can still qualify for a solo 401k if you have W-2 employees that fall under following:
- Employees under age 21
- Employees working part-time (working less than 1,000 hours per year)
Also, you can open a solo 401k plan even if your business employees the following:
- Union employees
- Nonresident alien employees
Business Owner’s Spouse Can Contribute to a Solo 401k
Since a Solo 401k is for business owners and their spouses, the business owner’s spouse is also eligible to participate in the same Solo 401k provided he or she is also self-employed in the business.
Minimum Dollar Amount QUESTION:
What is the minimum dollar amount for 1099 income that I have to show on my tax return to qualify to have a Solo 401K? Is there a specific number?
IRS Publication 560 (https://www.irs.gov/pub/irs–pdf/p560.pdf) which covers self-employed plans including solo 401(k) plans, simply states that you need to be performing part-time self-employment activity-it does not provide a dollar figure. What is important is that you are performing material services with the intent to make a profit. This is also discussed in Pub 560.
Essentially, earned income from self-employment is taxable income from running your own business. This also means you must reduce all expenses before computing net earnings from self-employment. See Rev. Rul. 56-407 under §1402(a). You can only make a solo 401k annual contribution if you have positive net income from self-employment activity for the year.
Who is Self-Employed?
Generally, you are self-employed if any of the following apply to you.
- You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business or a gig worker).
Trading Own Assets Eligibility QUESTION:
I have started (and shut) several S-Corps providing software development services for the financial industry over the years. However, this year I have exclusively focused on trading my own assets without any formal business (I plan to register an LLC next year for this purpose). Anyway, can I as a guy just trading his own cash for a living (6 figure investment income, daily trades, essentially full-time, including proprietary software development for this purpose) start a Solo 401k without any formally registered business this year?
Thanks for your inquiry. Unfortunately, trading your own assets does not qualify as self-employment activity that would allow you to set up a Solo 401k.
Part-time QUESTION:
I work a part-time job. Do I have to have a business to open a solo401k?
If you are self-employed (i.e. you are reporting active self-employment income on your taxes earned from your personal effort such as income reported on schedule C and not income reported on schedule E) with no full-time W-2 employees working for you, you can set up our solo 401(k) plan. In fact, you don’t need to set up an LLC or other legal entity as you could simply be a sole proprietor and set up a Solo 401k. The key is that you are engaged in some type of self-employment activity such as providing goods or services & reporting this activity on your taxes.
Seasonal Help
Also, if you perform contracting work for a business on a seasonal basis, that is also considered earned income from self-employment which would afford you to participate in your own solo 401k plan. Businesses often need to hire independent contractors on a seasonal or part-time basis. Businesses often need seasonal help for delivering goods, designing a website, performing repairs, preparing tax returns, etc.
Account for My Wife QUESTION:
I'm ready to get the ball rolling on my wife's retirement account. Can you tell which one would be best for her ? she is looking for an account where she can borrow up to 50% of the funds not to exceed 50K and repay within 5 years. I have a question though, for the "remaining" balance in the account over the 50k loan can that be invested as well?
If your wife is self-employed ( i.e. receives self-employment reportable income) and has no full time w-2 employees working for her self-employed business, then she would be eligible to open a Solo 401(k) plan with us.
Our plan allows for the type of Participant loan you are describing. The loan can be 50% of the solo 401k account balance up to 50,000 (i.e. in order to take a $50,000 loan, the account balance would have to be $100,000 or more) and we would assist you with transferring any former retirement funds into the Solo 401k account as part of our services. You could then invest the remaining balance in traditional and/or alternative investments
My Wife as Trustee of the Solo 401k QUESTION:
For my business entity/LLC, I am the only member/owner of this LLC. My wife currently is not an owner of this LLC. Can she still be a TRUSTEE in my SOLO-K that we are setting up?
Per our initial conversation, you need to be self-employed with no full-time employees. Moreover, the key in demonstrating that you are self-employed is that you are reporting self-employment activity (e.g. w-2 wages from your S-Corp, activity on Schedule C, etc.).
Your wife can be co-trustee (but not participate) in the Solo 401k even if she is not an owner of the LLC and not reporting self-employment activity. Having her as co-trustee will have the benefit of providing you both with signing authority.
You need to report at least some self-employment activity for the year that you open/establish the solo 401k plan on your taxes and going forward. This could be in the form of w-2 wages, activity on Schedule C, etc. Please note that you don't necessarily need to be profitable to receive self-employment income (i.e. you could be breaking even).
Compliance Requirements QUESTION:
Do you advise in terms of what we must do to stay in compliance?
Based our experience it is important to take a long-term view in choosing a Solo 401k provider with superior expertise and service as you will be setting up a 401(k) plan for your business which needs to be kept in compliance. As part of our ongoing services, we handle all of the ongoing compliance support for the solo 401(k) plan including mandatory plan updates and amendments, helping you respond to IRS compliance checks, tax reporting and filing, etc. All of this is included at no additional charge. Please see the following link for list of our services: https://www.mysolo401k.net/solo-401k/solo-401k-pricing/
Moreover, based on our experience we field the questions every day (even on Saturdays) from our existing clients ranging from helping them determine how much they can contribute to the plan to how to invest their solo 401(k) funds in real estate or other alternative investments in accordance with the solo 401(k) rules, etc. There is no additional charge for the support. Our track record is tremendous as demonstrated by the fact that we have over 75 reviews on the Better Business Bureau and all of them are five-star reviews.
Make Different Contributions by Solo 401k Participants QUESTION:
Does your plan allow for the respective shareholders to make varying contributions and to receive varying company contributions to their respective accounts (e.g., 10% of salary for me and 25% for my partner and his wife)?
Yes the plan allows for different solo 401K participants to make different contribution amounts. Because this is a solo 401k, it is not subject to the general 401k testing requirements which would require contributions to be made at the same percentage amounts.
Receiving Disability Retirement QUESTION:
I retired early from a government job through a disability retirement. The plan allows me to work part-time as long as I don't exceed a certain limit. My question is: Can I open a solo 401-K when I am receiving retirement income? I will be 60 years old next month.
Good question and the answer is yes you can open a solo 401k plan from a solo 401k qualifying perspective, regardless if you are receiving disability income, as long as you perform at minimum part-time self-employment activity and do not have any full-time W-2 employees working under your self-employed business. However, you would not be allowed to make contributions to the solo 401k plan based on your disability benefit payments. Other income that does not qualify for solo 401k eligibility or for making contributions includes the following:
- Alimony Pay stemming from divorce
- Earnings and profits from property and investments, such as rental income, interest income, and dividend income
- Deferred compensation
- Income from a partnership for which an individual does not provide services that are a material income-producing factor
- Pass-through income earned by a shareholder in an S corporation is not classified as earned income.
- Retirement income, including Social Security, pension, and annuity income
- Disability pay
- Worker’s compensation
In sum, not all income qualifies for opening/participating in a solo 401k plan regardless if you plan to make annual solo 401k contributions or not. When opening a solo 401k plan, make sure that you are truly self-employed (i.e., you are performing material services that help to produce the income).
Which is Better for Me QUESTION
I'm interested in opening either a SDIRA or a Solo 401K, but I don't know which would be better suited for my situation. I want to use it for commercial real estate investments.
While they both allow for investing in real estate including commercial real estate, not everybody qualifies for a self-directed Solo 401(k) plan because to qualify you have to be self-employed (at least on a part-time basis) and not have any full-time W-2 employees. With the self-directed IRA you are not required to be self-employed; however, and advantage of the solo 401k over the IRA when investing in real estate where debt financing will be utilized is that unrelated debt finance income tax (UDIF) does not apply to solo 401k plans but does to IRAs. To learn more about the differences and similarities between the solo 401k and IRA, please click here.
Returning to W-2 Employer Full-Time Employer QUESTION
I will be returning to full-time W2 employment in June which is why I will be getting the max contribution to my solo 401k plan while I’m still self-employed. Once I have the W2 job, can I still keep my solo401k active and contribute as usual as long as I make some sort of part-time income with my LLC ? If so, what is the minimum amount of income I must make in my self-employed business to still qualify?
To answer your first question, yes provided that your ability to contribute is always a function of your self-employment income. For your second question, there is no minimum (e.g. you could be "breaking even" in your self-employed business) but of course your ability to contribute is based on your self-employment income (e.g. if you have no self-employment income then you can't contribute).
LLC Required QUESTION
Do I need to also create an LLC or entity for the sake of the Solo 401K, or just give it a “name”?
No you don't need to create an LLC for the Solo 401k. You need to be self-employed but you don't have to have a legal entity for your self-employed business. For example, you can be a contractor and file a schedule C.
Funding Source QUESTION
To open a solo 401k will I need to have some sort of wages or earned income, or can it be opened and funded only with funds I move from a 401k at an employer that I am leaving?
While in order to open a solo 401k plan you merely need to be pursuing self-employment activity and not have any full-time W-2 employees, you generally have to continue to perform self-employment activity in order to continue with the solo 401k plan. Therefore, it would not be prudent to open a solo 401k plan, fund it with a transfer from a former employer 401k or IRA if you do not intend to pursue self-employment activity or to continue to perform self-employment activity in subsequent years.
Independent Contractors QUESTION
Are independent contractors considered as employees (and must work less than 1000 hours/year to qualify) or not, and it doesn't matter how many hours they work, yet as a sole manager of an LLC, I'd still be eligible for a solo 401k?
If legitimate independent contractors, it doesn’t matter as they will never be eligible to participate in your solo 401k plan regardless of the number of hours worked.
Spouse QUESTION
I am a financial professional considering using your services for my client’s solo 401k administration. And, I have a question: the spouse of the owner of an S-Corp has recently changed their primary job. They are not being paid by the S-Corp and for now assume they will not be paid a salary from the S-Corp. Can the spouse be a participant in the plan and rollover their existing 401k balance as well as a traditional IRA into the solo 401k? I understand they cannot contribute without being paid as an employee from the S-Corp.
Good question. No, because in order to participate in the Solo 401(k) plan you have to be doing self-employment activity. By virtue of being the spouse does not qualify you to participate in the plan. Therefore, if the spouse is not deemed a participant in the owner-only solo 401k plan, not only can he or she not make annual contributions to the solo 401k plan but also cannot transfer IRAs are former employer money into the solo 401k plan.
Flipping QUESTION
I am looking at solo 401k's and SDIRAs. Is a real estate investor with mostly passive but some active income from flips etc. considered self employed?
It is unlikely. Generally, that type of income is reported as investment income (eg on Sched E) where you don’t pay self employment tax. If you are reporting active self employment income (eg on Sched c) with no full time employees, you would be eligible.
New Solo 401k Adoption Deadline Due to the SECURE Act QUESTION
My self-employed business is a sole proprietorship, so can I wait to establish my solo 401k plan in 2025 for 2021?
First, for a sole proprietorship or an LLC taxed as a sole proprietorship, it is always best to open/adopt the solo 401k plan by December 31, so 12/31/2024 for those planning to open a solo 401k in 2024 so that it is effective for 2024. This will allow you to open the solo 401k bank or brokerage accounts the following year (2025) for solo 401k plans adopted by 12/31/2024 so that you can make both employee and employer solo 401k contributions by your personal tax return due date including extension.
Second, SECURE 2.0 changed the rules for sole proprietors (and single-member LLCs) planning to open up a retroactive solo 401k.
Third, there are now 2 (two rules)–one for making employee contributions and the other for making employer contributions.
The Solo 401k Employee Contribution Deadline Rule (Roth and Pretax)
The solo 401k plan now has to be opened by the taxpayers individual tax return (Form 1040) due date, so April 15 2025 if you want to make the solo 401k plan effective for 2024. However, this deadline is for making employee pretax solo 401k and/or employee Roth solo 401k contributions. This means 2024 solo 401k employee contributions would need to be made by April 15, 2025. As a result, if you want to make the solo 401k effective for 2024, it will be best to open the solo 401k plan prior to April 15, 2025 so that you will have enough time to make the employee contributions by April 15, 2025.
Example 1: Ben is a sole proprietor with a law practice. In February 2025, Ben decides to open a solo 401k retroactively for 2024. Provided the solo 401k plan is opened by April 15, 2025(his 2024 tax filing, without extensions), Ben will be able to fund the plan with both 2024 employee contributions and employer contributions. Note that he can also wait to make the 2024 solo 401k employer contributions by October 15, 2025
The Solo 401k Employer Contribution Deadline Rule (Pretax and Roth)
However, if the solo 401k plan is opened after April 15, 2025 but by October 15, 2025 it can be made effective for 2024 so that you can make employer pretax solo 401k and/or employer Roth solo 401k contributions. However, you would not be able to make employee pretax solo 401k and/or employee Roth solo 401k contributions for 2024 as those had to be made by April 15, 2025.
Example 2: Same example as above, Ben is a sole proprietor and in June of 2025 he decides to open a solo 401k retroactively for 2024. As long as the solo 401k plan is opened by October 15, 2025(his 2024 tax filing deadline with extension), Ben will be able to fund the plan with only 2024 employer contributions. However, he won’t be able to make employee contributions.
Voluntary After Tax Solo 401k Contributions–The Mega Backdoor Roth Solo 401k
Lastly, you will be able to make voluntary after-tax solo 401k contributions for 2024 as part of the mega backdoor Roth solo 401k if you wait to open the solo 401k by October 15, 2025 because you filed a personal tax return extension since your business is a sole proprietorship or an LLC taxed as a sole proprietorship.
The solo 401k setup deadline rules are different for all other entities- for example, a LLC taxed as partnership or S-corporation, corporations, partnerships and S-corporations.
For these types of self-employed businesses, If the solo 401k is not adopted until January 1, 2025 or after but by the self-employed business tax return including the business tax return extension deadline, the business owner can at minimum make employer profit sharing contributions as well as voluntary after-tax solo 401k contributions. Therefore, if you also want to make employee contributions for tax year 2024 in 2025 by your business tax return including extension, then the self-employed individual will need to open (i.e., sign the solo 401k plan adoption documents) the solo 401k plan by December 31, 2024.
Start Business Days Before Opening a Solo 401k QUESTION
I plan to open a solo 401k this year. Can I start doing self-employment activity days prior to opening the solo 401k plan?
Yes. The key is that you start reporting self-employment activity (e.g., Sched C for a sole prop or single member LLC business taxed as a sole prop) for the year that you set up the Solo 401k and going forward & have no full-time w2 employees working for you.
Son Working for the Business Eligibility QUESTION
The only other full-time employee in my S-Corp. is my son. Can I still open a solo 401k plan?
Since your son is also a W-2 employee in the business, he will need to be at least a 2% shareholder of your S-Corp. Please see the following: https://www.mysolo401k.net/can-an-s-corporation-have-an-individual-401k/
A solo 41k is for owner-only employee businesses; therefore, if your son is not an owner of the business, this will impact your ability to participate in a solo 401k plan as a solo 401k is for business owners and their spouses.
In sum, you would not qualify for a solo 401k if your business employs full-time NON-OWNER W-2 employees (an employee working 1,000+ hours per year) including your son.
12 Comments
How to fix a contribution error?
Please see the following link [https://www.mysolo401k.net/dealing-excess-nondeductible-solo-401k-individual-k-contributions/] as the rules surrounding the removal of excess solo 401k contributions depends on the contribution type.
Does mysolo401k.net support solo 401k’s in the US Virgin Islands?
Hello thanks for the great info. From what I have read the ability to contribute is based on self employment income . My question is that I have self employment income and also income from my W2. Can I use income from W2 to contribute or only income from my business ( still starting out so more income is coming from w2, also no employer contributions are bing made )
A doctor has k-1 ordinary income from a LLC (sole proprietorship having an EIN) and the LLC is a partner of a hospital that is a partnership firm. Can this doctor create a solo 401(k) based on his k1 income from the hospital? Can the doctor make employer contributions to the solo 401(k)?This income is ordinary business income.
Can a partner deriving k1 income from a partnership create a solo 401(k) in his own name and make employer contributions from k-1 income? Does the K-1 income have to be ordinary income ? OR can the income be from the sale of a rental property held by the partnership which will be in box 9c/10 of the k-1 ? The partnership is owned by 2 partners with no employees. The partners are not spouses.
If I have an IRA and roll some of the proceeds to a solo 401k then take a loan is it within the loan rules to use money from the IRA to pay back the solo 401k loan
I have a full-time W2 job, and will be starting part time work on my own formed as an S-corp. I was advised by a tax accountant to take k-1 distributions from my s-corp rather than a W2 salary. Can I open a solo 401k for my income from my part time S-corp k-1 distributions? Or can you only contribute to a solo 401k from s-corp salary?
Both my husband and I own a-Corps in which we are the only employees of our own companies I have a profit sharing 401 k currently set up in the name of my husbands business but including my business so we can both contribute
Can we roll that plan into one of these solo 401ks that you offer with the same set up?
Can a sole proprietor have both a 401a profit sharing/money purchase plan & a solo 401k? If so, does your company offer a 401a?
Minimum age question: Can a minor 17 years of age open and contribute to Solo 401K?
I have a W2 job and a 1099 job for which I have a mySolo401k. I can get another 1099 job from a separate employer. Do I need a brand new solo401k or can I contribute from both 1099 jobs to the one solo401k?