Just like traditional 401k plan for businesses with full-time non-owner employees, contributions to a self-directed solo 401k, which is a plan for owner-only businesses with no full-time W-2 employees, based on an individual’s compensation.
When the self-employed business is taxed as a partnership, the first step is to determine the contributing partner’s self-employment earnings (line 14 of the Schedule K-1) as detailed below.
2021: The maximum Solo 401k contribution for tax year 2021 is $58,000 plus $6,500 if you are 50 or older in 2021.
2022: The maximum Solo 401k contribution for tax year 2022 is $61,000 plus $6,500 if you are 50 or older in 2022.
Solo 401k Contribution Guides-Deep Dive
A partnership makes annual contributions to a partner’s Solo 401k account based on her net earned income (line 14 Code A of Schedule K-1 (Form 1065)).
Net earnings from self-employment
Start with self-employment income and then subtract the following:
Half of her self-employment tax
Refer to Publication 560 for tables and worksheets to assist you in calculating the deduction for contributions to a solo 401k plan for a partner. You may also visit solo 401k contribution calculator.
Partner’s earned income
As defined in Code 1402 and 401(c) (2), a partner’s earned income is the income she receives for her services to materially help produce that income. A partner is required to separately calculate her earned income for each trade or business.
Not every partner may have earned income (for example, a limited partner who does not provide services to the partnership and is merely an investor). Also, all of a partner’s income from the partnership may not be earned income (for example, investment income that is passed through the partnership to the partners).
Reporting a partner’s earned income
Each partner’s earned income or loss is listed on Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. The partnership must give a Schedule K-1 to each partner by the filing date (including extensions) of the partnership’s Form 1065, U.S Return of Partnership Income (instructions).
Solo 401k Contribution Deadline for a Partnership or LLC Taxed as a Partnership
- If the entity type is a Partnership (calendar year), the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is filed.
- If the entity type is an LLC taxed as a Partnership (calendar year), the annual solo 401k contribution deadline is March 15, or September 15 if tax return extension is filed.
For a Partnership or LLC Taxed as Partnership Where do I Report Contributions Made to a Solo 401k Plan?
- Contributions made based on your Schedule K-1 (Form 1065) income should also be reported on line 16 of Schedule 1 an attachment to Form 1040 as well as line 13 of your Schedule K-1 (Code R)
- See the below publications for reference regarding where to report contributions:
- See pg. 15 ” Where To Deduct Contributions” https://www.irs.gov/pub/irs–pd
- See Page 2 of K-1, Code R (Pensions and IRA’s) Under Line 14 instructions https://www.irs.gov/pub/irs–pd
- See Page 11, Definition of Pensions and IRA’s under Code R, which includes a qualified plan such as a solo 401khttps://www.irs.gov/pub/irs–pd
Taking on a Partner QUESTION:
Should my partnership take on another business partner (>2% ownership) what is the process to amend the solo 401k trust to include the new partner?
Since a Solo 401(k) plan is for owner-only employee businesses, as long as the partner meets this requirement, he or she could also participate in the existing Solo 401(k) plan. He or she would have her own participant account under the plan.
Can Spouse Contribute and/ or Transfer Funds QUESTION:
My wife does not earn anything through the self-employed business LLC…she works separately. Does that exclude her from being able to contribute or transfer IRA funds to the solo 401k plan? Can I still create one? Cause she is a 10% partner how does that effect anything?
She can’t merely be an owner but must work in the business. If you file as a partnership where you each get k-1’s self-employment income is reported on Line 14. If you each receive a k-1 with at least some amount reported on Line 14, this will demonstrate that you are self-employed & if there are no full-time employees working for you in any business you own/control you could establish a Solo 401k in which you each participate.
Publication 541, Partnerships
Publication 560, Retirement Plans for Small Business (SEP, SIMPLE and Qualified Plans)
Solo 401k for Business Partners QUESTION:
I have a small business that’s setup currently as a LLC. I brought on a partner in late 2019 and plan on changing over to a multi-member LLC this year. I have a 401k with my previous employer and would like to start our own 401k for this business. We don’t have any employees outside ourselves and a few 1099 contractors. I need to find something that is easy to manage and has a loan provision. Do you have something like that available?
Our solo 401k plan does allow for participant loans, and rollovers from previous employer 401k plans. You and your partner can participate in the same solo 401k plan, as a the self-directed solo 401k would be sponsored by the LLC. It will be one plan with two participant accounts for you and your partner to separately track your respective funds under the plan.