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Solo 401k employee contributions, do we need a new accountant?

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  • Solo 401k employee contributions, do we need a new accountant?

    My wife is a sole proprietor and has a solo 401k. Her income was above $19,500 last year (not much above due to covid). Our new account just told us that she over-contributed to her 401k by $6000 and we have to remove that money before filing taxes for 2020. This has never been an issue in the past. Is there a formula or floor where she has to reach a level of profit prior to being able to contribute fully on the employee side? My understanding was that she just needs to claim enough in income to equal the contribution up to the max. Appreciate any thoughts...I'm sure the tax questions are plentiful right now

  • #2
    You need to provide a little more detail.

    Employee deferrals can be up to 100% of self-employed earned income (business profit - 1/2 SE tax) not exceeding the employee deferral limit (2020 = $19,500) - any employee deferrals to other 401k, 403b or SIMPLE IRA plans.

    The total (employee + employer) annual additions cannot exceed the lessor of:
    • 100% of compensation*
    • Statutory limit (2020 = $57K)
    *The employer contribution itself reduces compensation. This can cause contribution limitations at lower levels of self-employed earned income.
    • Maximum employer contributions = (self-employed earned income - employee deferrals) / 2.
    • Maximum employee deferrals = self-employed earned income - (employer contributions * 2).

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    • #3
      What was her NET income? I'm not sure what you mean by, "she just needs to claim enough in income..." (emphasis added).
      Our passion is protecting clients and others from predatory advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

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