Solo 401k contributions

[cmallow17]

Hi there! Thanks for this event.

I am self employed with a sole proprietorship.  If I contribute to a solo 401K, will that help to lower my self-employment taxes? If so, do I need to make an employee or an employer contribution?

 Thank you!

[ScottT3]

Hi there!

According to 2024 IRS 401(k) and Profit-Sharing Plan Contribution Limits, as an employee, you can make salary deferral contributions equal to the lesser of $23,000, or 100% of your compensation.

[ScottT3]

You do have to be careful, however. Sole proprietors (Schedule C filers) cannot pay themselves a salary. Your net profit is considered your salary. If you elected S-Corporation treatment, it would be a different story.

[cmallow17]

Hi Scott,

 Thanks for your reply. So an employee contribution to my solo 401k would not result in a lower net profit, correct? 

I’m looking to optimize the Self Employment tax bill. Thanks!

[ScottT3]

You can make retirement contributions from net profit, yes.

This is an older IRS Fact Sheet, but a useful one.

https://www.irs.gov/pub/irs-news/fs-08-24.pdf

[VolvoGirl]

But right, it won't reduce your Net Profit and reduce your self  employment tax.  

[ScottT3 · Accepted solution]

VolvoGirl is correct.

As a Schedule C filer, self-employment tax stands on its own (based on net profit). You're certainly free to contribute to a Solo 401(k) but the self-employment tax is unaffected (since you can't pay yourself a salary).

You might want to consider electing S-Corporation treatment for this reason.

[cmallow17]

Thank you, Scott, for the advice and clarification!

[cmallow17]

Thank you, VolvoGirl!