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Solo 401k - How to do Profit Sharing?

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  • Solo 401k - How to do Profit Sharing?

    I have an S corporation with myself as the only employee. I understand I can contribute up to 25% of employee wages as a pretax profit sharing component, up to the $58,000 total maximum. How do I actually do it, I believe I am supposed to do it the following year (so in 2022 for 2021 tax year), and do I do it through payroll? Do I have to pay FICA or any other taxes on it? Do I report it on 2020 taxes for employer?

  • #2
    • You can pay as you go (employers with traditional 401k’s are required to deposit by the 15th of the month following payroll month, i think i recall, but your have until the extended due date of your tax return to contribute
    • No, you d/n contribute through payroll. This is an employER expense - think of it like your cell phone bill.
    • No FICA taxes as it is an employER expense. The employer and employee each owe 50% of FICA taxes, based on the gross payroll. Profit sharing is another expense based upon the payroll. It has an upper limit, same as Social Security taxes have an upper limit.
    • It will go on your 2021 Form 1120S, p1, line 17
    Are you a DIY on your taxes? If so, it is against my recommendation to continue with this practice. If not, and your CPA cannot help you with these answers, it is against my recommendation to continue with this CPA.
    Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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    • #3
      • First, "profit sharing" is a legacy term for true profit sharing plans that actually gave employees a share of the company's profits. That is why the contribution deadline is their tax filing deadline including extensions. They wouldn't know what their gross profit was until they filed their taxes and what the profit sharing amount would be.
      • There are very few true "profit sharing" plans anymore. These are technically and most often in practice simply non-elective employer contributions. You most definitely do not have to wait until the next year to begin non-elective employer contributions. You can make your contributions based on the W-2 wages each payroll period.
      • The reason you might have heard that it is better to make employer contributions in the following year is because excess employer contribution made during the tax year are a real mess, requiring the filing of Form 5330 and a 10% excise tax on the excess contributions. This is a bigger problem with self-employed individuals who are estimating their compensation during the year.
      • You will only have excess employer contributions if you contribute > 25% of compensation. This could either be excess contribution rate or insufficient compensation.
      • There are no timing restrictions when the employer contributions are deposited other than the tax filing deadline including extensions. The 15th of the following month is an employee deferral requirement, because it is the employee's money.
      • However, in practice some CPAs advise their clients make employer contributions on the 15th of the month following the pay period. This gives additional time to make sure there were no errors in payroll and since many CPAs advise monthly payrolls this makes the last month's contribution in the following year to reduce the possibility of excess employer contributions.
      Note: The maximum employer contribution is 25% of compensation not necessarily just W-2 wages. If the S-Corp pays or reimburses health care insurance premiums and/or HSA contributions, there is a specific procedure for these to be consider compensation but not subject to FICA. As compensation. they can be the basis for employer contributions.

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      • #4
        Thanks, great information both!

        My payroll company is different to my CPA so I was looking for which direction to go.

        That's a fantastic point about employer contribution being 25% of compensation, not W2 wages.

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