Solo 401k employee contribution question

[Doc29]

Hi all Another solo 401 k question.

We set up a solo for 401K for my spouse and she had a bit of independent contractor income for 2016. Approximately $16,000.

Question Can she legally contribute all of the 16,000 in the employee portion of the solo for 401K since Max is 18k, therefore having no taxes due on the IC portion, My understanding is this is due by the mid April filing deadline, so we still have time to contribute. My understanding is the 25% of the income is only for the employer portion. Is that correct?

Thanks you all in advance for the response.

[jfoxcpacfp]

Doc29 wrote:

Hi all Another solo 401 k question.

We set up a solo for 401K for my spouse and she had a bit of independent contractor income for 2016. Approximately $16,000.

Question Can she legally contribute all of the 16,000 in the employee portion of the solo for 401K since Max is 18k, therefore having no taxes due on the IC portion, My understanding is this is due by the mid April filing deadline, so we still have time to contribute. My understanding is the 25% of the income is only for the employer portion. Is that correct?

Thanks you all in advance for the response.

Click to expand...

Yes, the 20% (since it is IC income, not W2 income) is for the employer portion. This presumes she did not have another job at which she has already contributed any or all of the $18k employee allowance. She will owe FICA taxes, however.

She can contribute the full amount only if she has no deductions from her IC income (home office, supplies, license apportionment, mileage, and so forth). In other words, the contribution is based on her net income not her gross receipts.

[ENT Doc]

When did you set up the 401K?  If you didn't set it up until this year you can't contribute money earned in 2016 to a 401k set up for 2017.  The only way to contribute and get a tax deduction would be to set up a SEP (can still do this until tax deadline following the year of income) and roll this over to the 401k later this year (presuming you started it in 2017).  If you started it in 2016 and she didn't contribute more than $2k into another 401k then you can contribute the full $16k (assuming this is net income).  As far as the employer contribution portion, I don't believe you can contribute anything if 100% of the income has been put into the 401k by the employee.  Max is the lesser of 100% of income or $53K (or something close to this number).  There is a worksheet for the employer portion that takes this into account.  It's on Pub 560, page 23.  The 20% thing is tricky.  The max employer contribution is actually max of 20% x net income, where net income = income - expenses - employer tax deduction.  The latter ends up being Income x 0.9235 x .153 x .5.  I think the 25% figure is if you're in a 401k that's not a SE/Individual 401k.  Please correct me if this is wrong.