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cjallo
New Member

I earned 10K self employment income. I contributed 10K to an Individual 401K. TT software says I can only contribute 9270 to 401K. My max is 19,500. Why does TT say 9270?

I put the full amount of my self employment income into an Individual 401K. TT software says I over contributed and will pay a penalty, why? What am I inputting wrong here?
2 Replies
ColeenD3
Employee Tax Expert

I earned 10K self employment income. I contributed 10K to an Individual 401K. TT software says I can only contribute 9270 to 401K. My max is 19,500. Why does TT say 9270?

You forgot to take into account one half of SE tax.

 

Contribution limits for self-employed individuals

You must make a special computation to figure the maximum amount of elective deferrals and non-elective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

  • one-half of your self-employment tax, and
  • contributions for yourself.
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dmertz
Level 15

I earned 10K self employment income. I contributed 10K to an Individual 401K. TT software says I can only contribute 9270 to 401K. My max is 19,500. Why does TT say 9270?

TurboTax is correct.  The maximum that you are permitted to the individual 401(k) is your net profit from self-employment minus the deductible portion of self-employment taxes.  With $9,975 of net profit, the deductible portion of self-employment taxes would typically be $705, leaving only $9,270 available to contribute to the individual 401(k).  You must obtain a return of the excess contribution or risk the plan being disqualified.

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