The process of calculating the maximum contribution that an owner-only business may make to My Solo 401k is relatively straightforward. However, the calculations vary depending on whether the business is a sole proprietorship, a partnership or a corporation.
Sole Proprietor and Partnership
For sole proprietors, the figures needed to calculate the maximum contribution are the sole proprietor’s net profits from IRS Form 1040, Schedule C, and his or her self-employment (SE) taxes as determined on IRS Form 1040, Schedule SE. From these figures, the net earnings from self-employment may be calculated, which is the basis for determining the compensation that may be used for contribution purposes.
For partnerships, the figures needed to calculate a maximum contribution under My Solo 401k are each individual partner’s net profits, reported on IRS Form 1065, Schedule K-1, and each partner’s SE taxes as determined on IRS Form 1040, Schedule SE. Remember that he maximum My Solo 401k contribution is comprised of two components: an employer profit sharing contribution and an employee salary deferral contribution. Once net profits are determined, the following procedures for calculating the maximum amount of contributions are applicable for both sole proprietors and partnerships. In our next blog we will give examples of estimated calculation for a sole proprietor and a partnership.