I have entered Employer contributions for a Solo 401k, but they are not being deducted as a business expense. Please help with why and how to fix.

[dmertz]

If you have already contributed $23,000 at your W-2 employer, you can't use the Maximize function for an individual 401(k) because TurboTax does not support this situation.  To get the TurboTax to calculate the correct employer contribution only, remove the amount that you entered as an individual 401(k) employer contribution, unmark the individual 401(k) Maximize box, then go back and mark the Maximize box for a SEP contribution.  The employer contribution calculation is the same and the SEP Maximize function does not include any employee contribution.  The maximum permissible employer contribution will then be shown at the bottom of TurboTax's Keogh, SEP and SIMPLE Contribution Worksheet and on Schedule 1 line 16.

[weafrique]

I followed your steps and it turned out to be the same amount $13,088. However, what happened was that my tax liability increased ( my refund decreased). The dilemma here is that employer contribution has to be counted as business expense and should be decrease the tax burden instead of the opposite. Am I wrong?

[Smith16]

Hello,

I experienced this exact same situation with regards to the tax liability either not dropping or going up. 

I did have Turbo Tax check the program and they insist that it is correct. 

In analyzing it myself and walking back through the steps: I believe this happens because a contribution to the ER portion of your solo 401k actual decreases your QBI deduction. The Qualified Business Income Deduction. 

The tax code limits that to specified income and at certain levels. 

The reason why I believed that there was an error in TT is because a contribution as an ER should still reduce your self employment tax. So even though TT insists it's correct; it still doesn't make complete sense that there is no accompanying reduction in the tax liability. The "counter" at the top of the program does not move. 

[Smith16]

One additional thought to my earlier reply. 

Who wants to contribute $13k or more to the ER portion of ones Solo 401k plan if it makes no dent whatsoever to the tax liability? Especially when it will come out completely as income. 

It makes no sense. 

[dmertz]

As I said, a self-employed retirement contribution is NOT a business expense.  It does not go on Schedule C.  It is a personal, above-the-line deduction that reduces AGI.  It does not reduce net profit.

If marking the Maximize box for a SEP contribution results in a maximum employer contribution of $13,088, apparently your net earnings from self-employment are only $65,440.  Net earnings are net profit minus the deductible portion of self-employment taxes.  (That would imply that  your net profit is somewhere between $65,440 and $70,415, depending on the deductible amount of self-employment taxes.)  20% of $65,440 results in a maximum employer contribution of $13,088.

[Smith16]

DMERTZ : That was not my contribution nor income but the previous persons info. I was simply acknowledging the exact same experience. 

Noted as to the Solo 401k contributions not being a business expense. However can you explain why when walking through step by step in Turbo Tax and entering Solo 401k plan contributions, exactly as you have indicated; the QBI deduction goes down and there is NO reduction in tax liability in the TT counter at the top of the program? 

[gan-nn]

Did anyone figure this out? For a solo 401k, the employer contribution  has zero effect on tax due. Looks like TT is not doing the math correctly there. 

[VolvoGirl]

it only will reduce any regular income tax  you owe.  It won't reduce the self employment tax.  So if your regular income tax was already low or zero it won't change.  It just reduces your AGI so you get taxed on a lower amount.  But not the self employment tax on your Net Profit.

[Smith16]

No. Not figured out. Both Dmertz and Volvo who try to answer keep on insisting that it is due to "low income". 

I am not going to state my income on this community board, but that is definitely NOT the case. 

They were not able to answer or explain. Nor to give an example of how much income they actually think is "small". 
I can say that I made more income this year than in previous years and never have I had TT register the contribution as having no impact to my tax liability. 

No one can explain it nor provide an example

[gan-nn]

VolvoGirl - so that's not right. In fact if I do it this way, it correctly works (the math adds up). I just am not sure if TT will correctly generate the form 1040 though.

Here's what I did. I separately added the employer contribution as a business expense (picked the Misc category - and labelled it as "Employer Contributions to Solo 401k"). That did work - and the math was correctly applied and my tax due changed.

[VolvoGirl]

You need to look at the actual 1040 tax return.   What lines look wrong?  When you enter a transaction you can’t just watch the monitor. It will change your AGI and with that come many other changes in your return, not just the incremental tax on the one transaction.

[gan-nn]

VolvoGirl,

As a self employed worker, I can contribute both as an employee and and as employer. And both employee and employer contributions are tax -deductible. 

Turbo Tax even prompts you to enter both amounts in their retirement contributions UI. They label it as:

• Individual 401(k) (the 23K max for 2024)
• Employer Match

The amount entered as employer match has no effect at all in TurboTax. It should be included in Schedule 1 Line 16 per the IRS. I don't know if this is a TurboTax limitation or if there is some undocumented way to do this via their interface. 

I can work around by separately adding it as a business expense - but I am not sure if that's the best way to do this. (and when I do that, the tax amount updates correctly). 

[dmertz]

"I can work around by separately adding it as a business expense"

You are not permitted to do that.  Doing so would impermissibly reduce self-employment tax and you would be filing a false tax return.

If explicitly entering an employer contribution does not change the amount on Schedule 1 line 16, it implies that you have contributed all available net earnings as employee contributions.