Can Sole Proprietor with earned income but no “wages” make employee-side retirement contributions?

[messner8000]

My wife has a small business; it’s a sole proprietorship – she is the only person. We set up a solo ROTH 401(k). My understanding was that my wife can make two retirement account contributions each year – one as the “employee” and one as the “employer.” Accordingly, we made a 2022 employee-side contribution.  What I am trying to do is find authority (an IRS bulletin?) that says that this was okay.  The problem is that the IRS documents I’m aware of talk about employee-side contributions from “salary deferrals” or “wages.” But my wife doesn’t have any "wages" (e.g., she doesn’t get a W2) or a “salary” per se--just earned income.  Any ideas? I know TurboTax will let me fill out forms like it's okay, but I just want to make sure it is okay! 

[DavidD66]

There are two types of contributions you can make to a solo 401(k):

• Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
  • $22,500 in 2023 ($20,500 in 2022; $19,500 in 2020 and 2021), or $30,000 in 2023 ($27,000 in 2022; $26,000 in 2020 and 2021) if age 50 or over; plus
• Employer nonelective contributions up to:
  • 25% of compensation as defined by the plan, or
  • for self-employed individuals, see discussion below

If you are Self_Employed, you must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

• one-half of your self-employment tax, and
• contributions for yourself.

Elective deferral maximums include deferrals from all plans, so if your wife is a participant in a retirement plan at another job, any deferrals from that are included in the elective deferral maximum.

For additional information, see One-Participant 401(k) Plans on the IRS website.

[Mike9241]

yes you can

CODE SECTION 401(c)

(1)Self-employed individual treated as employee
(A)In general
The term “employee” includes, for any taxable year, an individual who is a self-employed individual for such taxable year.

*****************

a 401(K) plan can receive two different kinds of contributions 

a) elective deferrals by an employee (your spouse per the above definition)  

b) employer contribution

there is an overall limit for the year provided the plan does not have limits lower than allowed by law 

for 2022

a) the employee(your spouse) can make an elective deferral of up to $20,500. if 50 or over this rises to $27,000

b) the employer (the sole proprietorship) can contribute up to 20% of net SE income ie schedule C income less 1/2 the SE tax 

c) the max of both for 2022 is $61,000 if under 50. $67,600 if she's 50 or over.  IRC code sec 415

[messner8000]

@Mike9241  - does your answer account for the "special computation" rules at https://www.irs.gov/retirement-plans/one-participant-401k-plans and described in the first response to my post? Thanks!

[AliciaP1]

Yes, from Mike9241's post item b is the special computation explained in the post from DavidD66.  If you enter the elective deferral in the Self-employment Retirement Plans section and then check the Maximize Contribution to Individual 401(k) box, TurboTax will do the special calculation for you based on your elective deferral entry as well as the business activities you entered on Schedule C.

@messner8000