I am self employed and have made both Employee and Employer contributions to my Solo 401k. When I enter them in the Turbotax system, the Employee contributions are deducted from my income as they should be, but my Employer contributions are NOT being deducted from my business income. How do I get these to deduct from my business income? Thanks.
For pass-through businesses, the employee and employer portion of the Solo 401k contribution is reported on line 15 of Schedule 1. There is a direct connection from Schedule C to Schedule 1. For example, you report business (earned income) from Schedule C on line 3 of Schedule 1. Then, as part of the Schedule 1 calculation, the employer contribution to your Solo 401k becomes part of your adjusted income. Afterward, that is subtracted out of your taxable income. Finally, report adjusted income on line 8a of Schedule 1 on your 1040 form (see line 8b subtraction calculation).
Thanks, that's helpful, but the problem is Turbotax is not including the Employer portion of the contribution in Schedule 1, so Turbotax is not deducting the full amount of contributions. How do I get TurboTax software to deduct the Employer portion in addition to the Employee portion?
I am seeing a slightly different issue...TurbotTax Premiere is correctly tracking employer contributions to Solo 401K for the business owner. However, it is not calculating the employer contribution for a W2 employee as a business expense, which in this case is a spouse. TurboTax allows the entries to be entered for the spouse (in this case filing jointly) but it does not associate the W2 income reported for the spouse with the sole-proprietor as the employer.
As I understand tax laws, a spouse who is a w2 employee of the sole-proprietor and does not have employment elsewhere (no other W2 income) can contribute to the sole-proprietor's Solo 401K. These contributions have to be within contribution limits.
Is this another "unsupported calculation" in TT? If so, where is this documented and what is the work-around? Do I need to override the calculation and enter the correct figure so it shows up as a business expense?
Larry
I am having same issue as this original post. Did you ever find a fix? Thanks
Yes, I did figure it out. In addition to the Solo 401k contributions, I had also made contributions to a SEP IRA. The SEP IRA contributions and Employer Solo 401k contributions count towards the same tax-deductible retirement account contribution limits. I had maxed out my SEP contributions (based on my business income) and therefore the 401k employer contributions put me over the limit. Turbotax correctly will not let you double count.
The instructions in the link will take you step-by-step to enter your solo 401(k) contributions. Make sure to select 'Maximize Contribution to Individual 401(k)'.
A one-participant 401(k) plan is sometimes called a:
The one-participant 401(k) plan isn't a new type of 401(k) plan. It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.
@Nomanation
Hello,
I followed these directions exactly. But when entered as listed here and checked the box "maximize contributions, my tax liability does not go down at all. Meaning I see a reduction in my tax liability when I enter the EMPLOYEE CONTRIBUTIONS; but not for the contributions to the EmployER portion of my contributions to the plan. That does not make sense. If I make employer contributions the tax liability counter in TT should also go down. Otherwise it would seem that I am making "non-deductible" employer contributions. Why isn't it counting them?
In an earlier post I saw that TT considers this an "unsupported calculation". Does that mean that TT does not reduce your tax liability by the amount of ER contribution to your own Solo K? How do I fix this?
PS. I should clarify that I am a Single Member LLC and making contributions to a Solo 401k. Yes my income is in excess of the allowable amount. No I do not have any W-2 income that might affect the calculation.
So my question is still the same; why isn't TT calculating the deduction for the Employer contribution to my Solo 401k plan. It tells me how much I can contribute but does not then reduce my tax liability accordingly. How do I fix this?
Are you using the Keogh, SEP and SIMPLE Contribution Worksheet?
Deductible contributions to the solo 401(k) reduce the amount of compensation left to support an IRA contribution. 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.
The employee and employer portion of the Solo 401k contribution is reported on line 15 of Schedule 1. There is a direct connection from Schedule C to Schedule 1. For example, you report business (earned income) from Schedule C on line 3 of Schedule 1. Then, as part of the Schedule 1 calculation, the employer contribution to your Solo 401k becomes part of your adjusted income. Afterward, that is subtracted out of your taxable income. Finally, report adjusted income on line 8a of Schedule 1 on your 1040 form.
Here's more info on Calculating your own retirement plan contribution and deduction.
Here's more discussion on Employer Contribution for Solo 401K.
Thank you for your response. However it is inconsistent with the information on the IRS website publication 560.
The Solo 401 k Employee and Employer contributions have no bearing on IRA contributions; other than that they (Solo 401k contributions) may reduce your Schedule C income. And that is irrelevant to my question.
My question is why the EmployER Contributions I make for myself; when entered in Turbo Tax Home and Business; do not reduce my tax liability? Specifically the counter in the top of the program that shows my tax liability. As happens when I enter the EmployEE Portion?
You are permitted to contribute both as an EmployEE and an EmployER to a Solo 401k. ( I have NO employees- hence Solo K)
And why the heck would I buy Turbo Tax if I knew how to do and enter the calculation?? That's what people overpay TT for-to do the calculation. It's absolutely ridiculous to think that a TT buyer could follow what you have written here. What you write here implies that I cannot follow the step by step method and have the calculation be accurate. Nor are your instructions specific enough to follow using "forms".
Here is direct quote from the IRS website:
The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both: 1. Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
Will Turbo tax be fixing this calculation? So the program calculates things correctly?
Your solo 401(k) contributions are not permitted to exceed net earnings. If marking the Maximize box does not result in any employer contribution, it implies that all of your net earnings are being used to fund your employee contribution.
Net earnings far exceed Ee and Er contributions, combined.
And TT indicates the contributions I am entering are allowed. However my question is why dont the contributions reduce the Tt tax liability counter at the top of the program as all deductions do?
The deductions are deductible; when entered, the program should reduce my tax liability accordingly. The ER have no impact.
Users listed this as a problem last year too.
To look at this in detail and to report a possible product defect, we would like to see a diagnostic copy of your return. The information in this file is a sanitized copy meaning there is no personal information, only numbers so that we can troubleshoot in depth, check for calculation issues, and to see how certain items are applied. Here is how to order.
For Turbo Tax online, go to tax tools>tools>share my file with agent. When this is selected, you will receive a token number. Respond back in this thread and tell us what that token number is.
If you use the desktop version, go to the black stripe at the top of the program, click on online, and then select send tax file to agent. Let us know what the token number is.
Just to be clear; I provide you with my token number in this reply? Isn't this public?
Can you confirm? Thanks
[phone number removed][phone number removed]6
Also DaveF1006; I notice in another post having to do with Employer Contributions to a plan; the employer portion should be an expense to the business. It does not appear that TT is calculating this properly when one enters Employer Contributions for a Solo 401k plan. I calculated the approx. tax benefit I should receive from the ER contribution made; and the amount I hand calculated and TT tax benefit is about 1/3. Meaning TT registers no additional tax benefit in the "walk me through" everything tax owed counter at the top of the program. Not when entering business deductions and not when finishing up after entering the personal information. Because it does not register the deduction it then also disallows adding any monies to a deductible IRA. It's difficult to explain fully here, but the levels of income involved; this should not be happening. Thank you for looking into this.
The filter ate your token number. You can post a screenshot of it. It is safe to post the token number. That’s what it’s for to be secure.
I see that. It also won't allow me to post a screen shot of it. so how in the heck do I provide the token to you.
This is frustrating. Turbo Tax trying to squeeze out every last nickel in profit and sacrificing usability.
I reviewed your file and made the following observations. First, if you're self-employed and making employer contributions to your Solo 401(k), these are deductible as business expenses on Schedule C . However, the total contributions (employee and employer) are also shown on Schedule 1 as part of the changes to income. This is the way the IRS categorizes the contributions, health insurance, and 1/2 of self-employment tax.
This is confusing at first, but after looking at it. You were given the proper deduction for your solo 401K contribution. Here's the breakdown.
Look at Schedule C, Box 4 and compare this with Line 10. Schedule 1. It's the same. Now look at Schedule C and Line 5. This is also reported in Lines 15–17 in Schedule 1. These are the same. Now look at the bottom line in Schedule C and compare it with the bottom line in Schedule 1. It's the same.
To summarize all your business income, 1/2 self-employment tax, contributions to retirement plans, and health insurance is itemized separately on Schedule 1 rather than just reporting your total net income amount in line 3 Schedule 1. This is the way the IRS categorizes this type of reporting and it's confusing at best but you still must love the tax code and it's nuances. All your income and contributions are properly accounted for.
@DaveF1006, employer contributions to a solo 401(k) are not deductible on Schedule C. They only go on Schedule 1 line 16 as part of the self-employed retirement deduction, which you indicated. Only employer contributions for non-owner employees are deductible on Schedule C, and a solo 401(k) is not permitted to have non-owner participants.
Hi Dave,
Thank you for your careful review.
-Do you know if the tax deduction for Solo 401k plans changed or was otherwise reduced for tax year 2024? My search does not reveal anything to suggest that. But the tax benefit is proportionately less than previous years when looking at the Tax History/Summary list and year on year comparison.
-When taking the full eligible contribution, calculated by TT, only offers roughly a 3% tax benefit from a tax reduction standpoint. Which is far less than in previous years. And the reduction seems to be only from the amount contributed as an EE not from the addition of the ER portion.
-Might you explain why the tax liability counter at the top of the program does not register a reduction in the tax liability when the "max" bar is checked? Usually as I add expenses, the counter moves. Does the ER contrib. portion not show the tax liability reduction until some other entry is made? I did not notice this if it did.
-Were my entries made properly for a Single Member LLC, non pass -thru, Schedule C business?
-Lastly, does the maximize benefit box, include an allowable amount that does not provide any tax benefit? Like are the ER contributions, or some portion of not tax deductible? Such as with an IRA contribution? Like say when you may be allowed to contribute the full $8000 (regular plus catch up) to the IRA but only $5000 is tax deductible or provides a current tax benefit?
Thank you so much for your help.
Is this new for 2024? Then how does a business owner benefit from making the Employer contributions for themselves? The IRS.gov site specifically states that when contributing to a Solo 401k plan the business owner is both employee and employer and can therefore contribute in both capacities. Where does one receive tax benefit from the Employer contributions?