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  • Confused about Solo 401k

    Hello! This is my 1st time opening a Solo 401k, and I'm confused about the contribution limits as well as how to contribute:

    1) For the employEE portion, I understand the max is $19.5 and 100% compensation. Is it correct to calculate gross income - expenses, and that's the amount I can contribute (assuming no other 401k sources)? (I am wondering for LLC and S corp, as my spouse is doing this also, but separately from me)

    2) How do I make this contribution? Is it as simple as transferring money from my business bank account to the Solo 401k?

    Thanks in advanced!


  • #2
    1. The max employee contribution is the lower of:
      • $19,500 or
      • W2 wages if you’re employed
    2. For an employee to contribute to a solo-k
      • Employer completes the paperwork to establish the 401k at custodian of choice
      • Employee completes the paperwork to open individual account (these 1st 2 steps are handled together for a solo-k)
      • Employer withholds 401k contribution from employee’s paycheck
      • Employer deposits the withheld contribution to the employee’s account
    Welcome to the forum!
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

    Comment


    • #3
      Thanks for the quick response!

      For #1 (maximum contribution to solo401k), how do you calculate it if it's not W2, but instead 1099 pay?

      Comment


      • #4
        • A self-employed individual's one-participant 401k contributions are based on their self-employed earned income (net earnings from self-employment) = business profit - 1/2 SE tax.
        • As you noted, their maximum employee deferral is up to 100% of their self-employed earned income not to exceed the employee deferral limit (2021 = $19,500).
        • The calculated maximum employer contribution is 20% of their self-employed earned income. At low earned income levels this can be limited to (earned income - employee deferrals) / 2.
        • The combined (employee + employer) contributions can not exceed the lessor of their self-employed earned income and the statutory annual addition limit (2021 = $58K).

        Comment


        • #5
          Thank you!

          Comment


          • #6
            Still unclear about employER contribution limits to 401k. Greatly appreciate the help here. This is my first year with a solo 401k! And my first post!

            I have income from multiple W2 jobs as well as 1099 income & I have an LLC that files as s-corp for my 1099 income. I pay myself through ADP with my 1099 income. Total 1099 income was around 410k, payroll thru adp was approx 170k, and after business expenses (approx 130k) the net distribution will be around 110k. I am trying to max out the employER contribution to the solo 401k (up to $58k) since I already maxed out the employEE contribution to a different, unrelated 401k thru one of my W2 jobs.

            For the employER component to the solo 401k - how is it calculated with an LLC filing as s-corp with pass-thru? I am trying to understand this bullet point below -- is this total 1099 income minus expenses upon which to calculate the base? Or is it based only on income that came thru on the payroll? "Net earnings from self employment" would seem to include profit as well as the distributions from my 1099 income? So would it be 25% of 170k or 25% of 280k (170 + 110) or 25% of some other number?
            • A self-employed individual's one-participant 401k contributions are based on their self-employed earned income (net earnings from self-employment) = business profit - 1/2 SE tax.

            I also don't understand what it means that the employer has to withhold the money for the solo 401k from the paycheck? I have just been transferring in money into the solo 401k account from my bank account and then deducting that amount as a business expense for my s-corp. Is this completely wrong?
            Last edited by babyboss; 12-16-2021, 04:51 PM.

            Comment


            • #7
              @babyboss:
              • you are not self-employed, you are employed (receive a W2). Employer contribution calc is easy - 25% * $170k = $42,500. The “distributions” are irrelevant.
              • the employer (you) withholds your 401k contribution from your pay. Nothing is withheld “from” your 401k contribution.
              • from facts provided, I don’t believe using an s-corp structure for your business entity is cost efficient. It is probably costing you more than it is saving you.
              • if you have a retirement plan(s) from any of your other W2 work, it is worth noting that you are responsible for
                • making sure you do not contribute > $19,500 to a combination of available space in all plans and
                • d/n contribute > $58k total to a combo of 403b and solo-k plans
              Welcome to the forum!
              Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

              Comment


              • #8
                jfoxcpacfp
                Thank you! Such clarity! And you are indeed correct.... Not enough business income/profit to justify the s corp. Woops. Paying myself as an s-corp has hurt the total I can contribute to my solo-k since it is only 25% of the net earned income, not of total business profit (ie - doesn't include distributions). Whereas, sole proprietor LLC would have been better to just pay estimated taxes, forget the payroll nonsense, and still have 280k net business income upon which to calculate the solo 401k contributions (and hence, would have been able to reach the 58k limit). Sigh. Hindsight. Might try to revert back to LLC --- should I do that before filing the 2021 tax returns??

                Also, about the other retirement plans - yes I have 403b and 457b available in 2022 for a different W2 job. I did NOT know that the 403b plan is an exception to to the multiple employer rule! No! At least the 457b does not count. So I could do 20,500 to 457b and total of 61k to combo of 403b & solo-k plans? And I could potentially do 20,500 to a separate 401k from yet another W2 job? Yes, I have lots of jobs.

                Thanks for keeping me in line! I should probably get on your waitlist!

                Comment


                • #9
                  Originally posted by babyboss View Post
                  jfoxcpacfp
                  Might try to revert back to LLC --- should I do that before filing the 2021 tax returns??

                  Also, about the other retirement plans - yes I have 403b and 457b available in 2022 for a different W2 job. I did NOT know that the 403b plan is an exception to to the multiple employer rule! No! At least the 457b does not count. So I could do 20,500 to 457b and total of 61k to combo of 403b & solo-k plans? And I could potentially do 20,500 to a separate 401k from yet another W2 job? Yes, I have lots of jobs.

                  Thanks for keeping me in line! I should probably get on your waitlist!
                  Appreciate the kind and enthusiastic words.
                  • Revert back to LLC…there are several issues here:
                    • If you terminate your S election and revert to an LLC, you will not be permitted to elect S status for 5 years. This may be perfectly fine for you (and probably is), but just consider whether consolidating all work to 1099 is a possibility.
                    • If you become an LLC, there is really no need to continue, especially if you are living in a state with high minimum fees for annual renewals (that would be CA), so consider dissolving the LLC, also.
                    • Regardless, if you terminate your S-election now, you will need to file an 1120S (S-corp return) covering 1/1/21 - 12/xx/21 and a schedule C for your SMLLC for the remaining days of the year.
                  • Didn’t realize you were age 50+ (s/h considered, sorry). Assuming that you qualify to make a catch-up contribution:
                    • You can contribute up to $26k as employee deferral to 457b
                    • You can contribute up to $64,500 in employer PS to a combined 403b+solo-k
                    • No, you cannot contribute an extra $20,500 to a separate 401k. Employee deferrals are limited to no more than $19,500/$26k total across all 401k/403b plans
                    • Not sure of the significance of $20,500, unless you mention already contributing $5,500 above and I missed it (I am very sleepy and it’s possible!)
                  Good night and good luck!
                  Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                  Comment


                  • #10
                    Great info. May just terminate the s-election for 12/31/21 and then change all the W9s back to single member LLC effective January 1, 2022.
                    Would keep LLC as I am trying to creating a skincare product and would want to advertise under the LLC name. At the same time -- if that becomes wildly successful in the next 5 years then I would be stuck without distributions.

                    Also, am not over 50. I was projecting with numbers for 2022 strategy....hence the $20,500. Still bummed that a 403b eats into the solo-k total but a 401k (from separate job) doesn't. However, at my institution, one can't contribute to the 457b unless the 403b allocations are set to max out. And the match from the university comes from the 403b of course... so 403b it is. First world problems. I will still enjoy the ~81k bucket of tax deferred savings for 2022.

                    Thanks again!

                    Comment


                    • #11
                      Originally posted by babyboss View Post
                      jfoxcpacfp
                      Thank you! Such clarity! And you are indeed correct.... Not enough business income/profit to justify the s corp. Woops.
                      It was only indirectly about the S-Corp's total pass-thru income. An individual with other W-2 employment and total W-2 Social Security (SS) wages >= SS maximum taxable earnings (MTE, 2021 = $142,800) probably should not use an S-Corp for moonlighting 1099 income. The SS FICA component is required to be deducted from all employees (including S-Corp 2% shareholder-employees) up the SS MTE.

                      While the 6.2% employee share can be recovered with a credit for excess SS FICA taxes on their 1040 tax return, the 6.2% employer share can not. In such a scenario, an S-Corp only makes sense if distributions are significantly > W-2 wages (>= 2X in CA). However, in most situations with 1099 income primarily from the performance of personal services, that would not be reasonable compensation.






                      Comment


                      • #12
                        jfoxcpacfp
                        First off, Happy Birthday!
                        Secondly, as luck would have it - my s-corp election was never received/sent/processed by the IRS! Not sure what happened (was "sent" in early Feb 2021). I think my tax attorney didn't handle it properly. Either way, I got thru to the IRS yesterday and they confirmed no s-corp for my EIN.
                        Anywhoo --- just thought I would follow up. This seems to be in my favor since my other W2 employment for 2021 (which was over the MTE) and would have hurt my 6.2% employer share from my s-corp plus honestly not worth all of the additional paperwork to save on a 100k or less distribution or something paltry like that.
                        IRS told me to file 941x now for the 2021 quarters to reverse my liability amounts and eventually get a "refund" of the taxes paid which will just go right back to the IRS of course but as an independent contractor/single-member LLC.
                        I am guessing I will then get hit with penalties for underpayment of estimated taxes and may need to file abatements for those down the line.
                        Does this all sound correct? I am also completing new W9 forms with individual/sole proprietor checked off instead of LLC - S. not sure if that is necessary or will change anything but I want the W9 to be correct.

                        Comment


                        • #13
                          Originally posted by babyboss View Post
                          jfoxcpacfp
                          First off, Happy Birthday!
                          Secondly, as luck would have it - my s-corp election was never received/sent/processed by the IRS! Not sure what happened (was "sent" in early Feb 2021). I think my tax attorney didn't handle it properly. Either way, I got thru to the IRS yesterday and they confirmed no s-corp for my EIN.
                          Anywhoo --- just thought I would follow up. This seems to be in my favor since my other W2 employment for 2021 (which was over the MTE) and would have hurt my 6.2% employer share from my s-corp plus honestly not worth all of the additional paperwork to save on a 100k or less distribution or something paltry like that.
                          IRS told me to file 941x now for the 2021 quarters to reverse my liability amounts and eventually get a "refund" of the taxes paid which will just go right back to the IRS of course but as an independent contractor/single-member LLC.
                          I am guessing I will then get hit with penalties for underpayment of estimated taxes and may need to file abatements for those down the line.
                          Does this all sound correct? I am also completing new W9 forms with individual/sole proprietor checked off instead of LLC - S. not sure if that is necessary or will change anything but I want the W9 to be correct.
                          Wow, this is one of those rare situations in which you can have your cake (I turn 65 on 1/12/21, so pun intended) and eat it, too:
                          • Yes, you can stick with sole proprietor.
                          • But…since this is your professional’s screw-up and you have been treating your practice as an S-corp, then you also have permission to file a late s-corp election under Rev Proc 2013-30
                          This sounds correct to me. You just ignore the Rev Proc and ask your attorney to correspond with the IRS to request that any penalties be abated if and when they are assessed (read below).

                          Your attorney s/h sent the request requesting proof of delivery. Given the timing of when you/atty filed, s/he may have this proof and the IRS didn’t process. We’ve had one COVID season client to whom this has happened. The IRS is still dangling by a thread when it comes to service and processing + tax season is about to be underway.

                          Given that you have decided you don’t need to be an s-corp (appears right to me), I would follow the IRS’ advice you articulated above and ask your “tax attorney” (that was overkill) if s/he will at least handle the communication and corrections without charge.

                          You are completing the W9 correctly but I’m not sure that is even necessary. spiritrider may have some thoughts (in fact, would appreciate his input on this whole kerfluffle...) My reasoning is that you could ask for change of status when you prepare the letter of explanation and request for abatement, if applicable. Since you have paid in taxes throughout the year, I would guess that you will be counted as timely paying your tax liability, but that is only a guess. Filing a new W9 may even invalidate those timely payments, another guess and I’m way out on a limb here. Obviously, you would want to avoid that. And I’m also guessing you may have graduated training in summer 2020; if that’s the case, you should have a fairly low safe harbor to meet.

                          The IRS has had much experience with this issue; I’d worry more about getting it all processed correctly and timely due to COVID than the penalties and interest. COVID should be another escape hatch for you, if penalties even apply in your case.

                          Good luck!
                          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                          Comment


                          • #14
                            Kerfluffle, I like that word. Although, I'm usually the one causing it.

                            This is definitely a mess. I have seen CPAs direct sole proprietors to incorrectly pay themselves W-2 wages. I and likely jfoxcpacfp have probably seen partnerships incorrectly pay partners as W-2 employees. Although I have not seen the remediation used to clean up the mess.

                            I agree with jfoxcpacfp that there should be someway that your W-2 withholding timeliness is still taken into account to mitigate any underpayment penalty.

                            It would make sense to provide your client(s) with revised W-9s for 2022.

                            I second Johanna's sentiment. I'm sure it is particularly frustrating to find that a professional that you paid significant money to, is the cause of this mess.

                            Comment


                            • #15
                              I have been wondering about this myself after getting a new 1099 job (main job W2)
                              2022 Limit is $61k
                              I contribute my normal W2 401k $20,500
                              My W2 employer contributes $36k
                              Total = $56,500

                              Means I am short $4,500 of max contribution (61k-56.5k)

                              I just got a 1099 job. Say I make $20k+ on this job. Can I open a solo 401k and put in $4,500 this year?

                              Thanks for your help

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