Here are the steps to calculate your maximum solo 401(k) contribution:
- Gross profit (income less all other business expenses) - here we will use the round number of $100,000 . $100,000 * .9235 [this number comes from Schedule SE, the simplest way to start this process] Result here is $92,350 You can go through Schedule SE here which I find a very helpful exercise to get started.
- $92,350 *.153 (the full SE tax rate) Result here is $14,130. This is the actual SE tax that you'll pay.
- $14,130/2 = $7065 (half of the actual SE tax) (CAUTION: this is a different number than you'll get if you multiply 100,000 times half of the SE tax rate (.0765) though the numbers look very similar in this example.)
- $100,000-$7065 (half of the actual SE tax) = $92,935
- $92,935 *.20 In your case. The .20 is derived by taking the plan contribution rate (.25) and dividing it by 1+contribution rate, so .[25/1.25], which gives us 20% here.
- Employer contribution is then $18,587
- Total $18,587+$22,500= $41,087
For this example, I assumed that you are under age 50 and not eligible for any catchup contributions.
TurboTax will help you calculate based on your final numbers. There are also a number of solo 401(k) calculators on the internet which can be helpful to verify your calculations.
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