My total contribution this year to my solo 401k is less than either the elective limit (18k) and also less than the profit sharing based limit. Also, even if I decide to contribute more, it may not exhaust the total of my full limits.
Should I first use the elective limit or the profit sharing limit? Is there a benefit to using one classification vs. the other if I am not using the full extent of both contributions? Either is tax implications or paperwork overheads. From what I understand, I can make a single lumpsum contribution. DO I have to do some extra paperwork to show a monthly slaary if using the elective contribution limit? (I do not run a payroll since I just keep the net proceeds from my sole proprietorship as income.
It's usually advantageous to first treat contributions as elective deferrals or Roth contributions up to the regular elective deferral (section 402(g)) limit. This ensures that you are permitted to make the maximum permissible combined employee and employer contribution.
Once in the 401(k), there is no distinction between elective deferrals and employer contributions. However, if your solo 401(k) allows and you choose to make Roth contributions, the Roth contributions can only come from the employee portion. Employer contributions are always traditional, pre-tax contributions.
Note that your total contributions and your employer contribution will be separately limited by your net earnings from self-employment. Net earnings are your net profit minus the deductible portion of your self-employment taxes. The amount that you are eligible to contribute will be maximized by first treating all contributions as elective deferrals or Roth contributions, and any remainder (in your case there will be none) as employer contributions, and then, finally, as catch-up contributions if age 50 or over. TurboTax determines your maximum permissible total contribution in this manner, so be sure to allow TurboTax to calculate your maximum for each category. Your plan records should include the details of the split between employee and employer contributions to be able to substantiate that you have not exceeded the permissible limits.
In my own case, I allocate all contributions in the order detailed above because I contribute the maximum permissible under the law.