How do you calculate net profit for Solo 401k contribution

[myn7055]

I started working as a contractor in December, 2024. My income was $5,000. My business expenses were $3,000, including start-up costs. I understand that solo 401k contribution limits are calculated based on net profit from my tax Schedule C. How do I calculate net profit? Is my net profit $2,000 ($5,000 - $3,000)? If so, is the maximum contribution that I can defer into my solo 401k is $1,858?

[dmertz · Accepted solution]

With $5,000 gross self-employment proceeds and $3,000 of expenses, your net profit shown on Schedule C will be $2,000.

The maximum that you can contribute to a solo 401(k) is the amount of your net earnings.  Net earnings are net profit minus the deductible portion of self employment taxes.  Assuming that you do not also have W-2 income that would cause you to max out the Social Security wage base, your net earnings from $2,000 of net profit would be:

$2,000 - ($2,000 * 0.9235 * 0.153) / 2 = $1,859.70

With rounding of each step as calculated on TurboTax's Keogh, SEP and SIMPLE Contribution Worksheet, the result is:

Round($2,000 * 0.9235) = $1,847

Round($1,847 * 0.153) = $283

Round($283 / 2) = $142

$2,000 - $142 = $1,858