Miscalculation of Employer Profit Sharing 401k Contribution after Employee Roth 401K contribution

[user17712185298]

My wife is self employed as a a sole proprietor.  She has a Solo 401K account with ETrade, which allows both Roth and Traditional 401K contributions. In Year 2025, her net business income was $39131 (Gross Income - Expense) and her self employment tax was $5529. So her adjusted net business income was $39131 - $5529 / 2 = $36366. 

She made $23500 contribution to her Roth Solo 401k account in 2025.  TurboTax seems to be making a mistake on the calculation of how much profit sharing contribution she is allowed to make as an employer. Because her employee contribution was a Roth contribution, the allowed amount should have been $36366 * 20% = $7273. However, in the Federal Taxes > Wages & Income > Business Items > Business Deduction and Credits > Self-Employed Retirement Plans section, TurboTax insists that the maximum allowed employer contribution is ($36366 - $23500) * 50% = $6433, as if her employee contribution was deductible. And that number appears in Schedule 1 Line 16.

But this is not the only problem, because it also affects the subsequent calculation of her eligible QBI deduction.  In Schedule 8995, Line 1, it starts the form with Qualified Business Income as $29933, which comes from $36366 (Adjusted Net Business Income) - $6433 (Employer 401K Contribution) . This is a mistake again, because the actual Employer Profit Sharing contribution, as I stated earlier, should have been $7273. So the correct QBI should have been $36366 - $7273 = $29093 instead. 

Did I get it right, or maybe I have made an input error somewhere in the software? I am using TurboTax Deluxe 2025 on MacOS. 

MJ

[dmertz · Accepted solution]

TurboTax's calculations are correct.  In this case, the maximum employer contribution is indeed $6,433.

This has to do with the fact that the employer contribution effectively reduces the amount of net earnings against which to compare the section 415(c)(1)(B) limit of 100% of compensation.  That's why no more than 50% of what remains after subtracting employee contribution can be contributed as the employer contribution.  It does not matter that the employee contribution is Roth.  With the effective net earnings reduced to $29,933 by the $6,433  employer contribution, the amount available to contribute as an employer contribution is $29,933 - $23,500 = $6,433.  Because the employer contribution must be subtracted from net earnings, the QBI is $29,933.

[user17712185298]

Makes sense. Thanks for the explanation.