How to make Turbo Tax deduct employer contribution for solo 401k?

[favonianzs]

I am self-employed with a solo 401k. I have input the Employee elective deferral contributions and the Employer Matching contributions into TurboTax, but only the Employee contributions are being deducted. The Employer contributions are not being deducted from my income and therefore not reducing my tax liability. 

Both employee and employer contributions should be reported in Schedule 1 (Form 1040), line 16, but Turbo Tax seems to only include the employee portion in the calculation. Is there a way to bypass this? Enter the employer contribution portion somewhere else in the expense or something?

Thanks!

[tagteam]

@dmertz ?

[dmertz · Accepted solution]

TurboTax will limit your self-employed retirement deduction to the amount that you are permitted to contribute, based on your net earnings from self-employment.  Amounts contributed in excess of the permitted amount are subject to a 20% penalty on Form 5330.  TurboTax does not support Form 5330.

Review the calculations on TurboTax's Keogh, SEP and SIMPLE Contribution Worksheet to see the maximum permissible contribution.

[favonianzs]

Thanks @dmertz . Turbo Tax did calculate the maximum contribution based on my self-employment income. Is that maximum allowed the sum of employee solo 401k contribution, Roth contribution, and employer match contribution? 

Eg. For an income of $15k, turbo tax calculated the max. allowed contribution is $14k. Does this 14k include only the employee contribution to 401k and Roth 401k, or does it include the employer match/profit sharing contribution as well?

Thanks!

[dmertz · Accepted solution]

From net profit on Schedule C of $15,000 you must subtract the deductible portion of self-employment taxes, $1,060, leaving $13,940 as the maximum permissible total contribution.  Because this is less than the maximum amount of elective deferrals, this is all allocated to elective deferrals (or Roth contributions), leaving nothing to contribute as an employer contribution.

[favonianzs]

Thanks @dmertz , that makes perfect sense! A follow up question, does IRA contribution count towards this maximum allowable contribution? That is, IRA contribution+elective deferral to solo 401k+employer contribution to solo k <= Schedule C of net self-employment income minus the deductible portion of self-employment taxes, if self-employment income is the only source of earned income?

[dmertz · Accepted solution]

Deductible contributions to the solo 401(k) reduce the amount of compensation left to support an IRA contribution.  As you suspect, the sum of the deductible portion of self-employment taxes, the self-employed retirement deduction and the IRA contribution are not permitted to exceed your net profit from self-employment (absent any compensation from a W-2).

Because only deductible contributions to the solo 401(k) reduce compensation available to support an IRA contribution, you could make some amount of your your employee contribution to the solo 401(k) be a Roth contribution (plan permitting) allowing you to use the same compensation to support an IRA contribution.  (A quirk in the tax code.)  TurboTax automatically determines the amount of compensation available to support an IRA contribution.  Note that unlike an IRA, there is no provision to recharacterize 401(k) contributions between traditional and Roth, so if you have already contributed the maximum elective deferral, you won't be able to change that to Roth.

[favonianzs]

Thanks so much for the explanation @dmertz . Just want to make sure I understand you correctly, for a net profit on Schedule C of $15,000, I subtract the deductible portion of self-employment taxes, $1,060, then it leaves $13,940 as the maximum permissible total contribution for solo 401k and Roth solo 401k. Within this $13,940, if I contribute $6000 to Roth solo 401k and $7,940 to regular solo 401k, then I am allowed to contribute $6000 to either Roth IRA or Traditional IRA or split between the two?  

[dmertz]

All correct.  Of course if you are talking about doing this for the 2022 tax year, the deadline to make IRA contributions has passed unless you are in a federally declared disaster area where the IRA contribution deadline has been extended to October 16, 2023.

[favonianzs]

Thank you, @dmertz ! I was indeed referring to the 2022 tax year. Unfortunately, I've just learned that the IRA contribution deadline remains April 15th even with a filed tax extension, so I missed that opportunity. However, I believe the contribution deadline for solo 401k deferrals and employer matches for a pass-through single-member LLC is extended until October 16th with a tax extension filed in April, correct?

[dmertz]

You have until the due date of your tax return, including extensions, to make the employer contribution to the solo 401(k).

Regarding the employee elective deferral or Roth contribution, you were required to make the election to for these by December 31, 2022.  If you made that election, you are supposed to make the deposit as soon as practical, but no later than the due date of your tax return, including extensions.  Of course it's not practical to make the employee contribution until you are sure that you have the net earnings to support the contribution.  Even if you didn't know the exact amount on December 31, your election by that date could have specified the maximum and your contribution would then be potentially limited once your net earnings are known.

(For 2023 and beyond, the SECURE 2.0 Act makes the deadline to make an employee election the due date of the tax return for new plans established by the due date of the tax return for that year, but that does not apply in your case because the contribution in question is a contribution for 2022 and in 2023 it won't be a new plan, so your election deadline will be December 31 of each year going forward.)

[favonianzs]

Thank you, @dmertz ! Yes, I was aware of the December 31 election deadline and specified the maximum deferral allowed. I plan to make the contribution in the next couple of days before I submit my tax return. Your expertise in retirement plan tax rules is truly impressive! Thanks to your explanation, I finally understand how it all works!