Self-employed 401(k) Maximum Employer Contribution

[parikh2us]

I have two questions:

(1) For my Self-employed 401(k) plan, if I enter 0 for Employee Contribution and 0 for catch-up contribution, what is the maximum amount I can enter for the Employer Contribution if the net business income is $178,000?  I thought the limit for Employer Contribution is 0.25% of the net business income, so it would be $44,500.  But TurboTax (2024) lets me enter $63,706 and does not flag an error.  Not that since I have 0 for employee contribution and catch-up contribution, the total amount of $63,706 is still below the maximum allowed $69,000.

(2) Instead of the amounts in (1), if I enter $23,000 for employee contribution and $7,500 for catch-up contribution and $33,206 for employer contribution (max allowed), the total is still $63,706 (the same as in (1)).  But in this case I end up paying more tax than in (1).  Why?  Is it because the tax deduction on employer contribution is higher than that on employee contribution?

Thank you.

[dmertz · Accepted solution]

"I thought the limit for Employer Contribution is 0.25% of the net business income"

That's incorrect.  The maximum employer contribution for a self-employed individual is 20% of net earnings.  Net earnings are net profit minus the deductible portion of self-employment taxes.  The 25% base rate reduces to 20% because the employer contribution effectively reduces the net earnings on which the 25% base rate would apply.  With no W-2 income where you pay Social Security and Medicare taxes that would reduce your self-employment tax, your maximum employer contribution with $178,650 of net profit  is $33,206.

Your maximum elective deferral of $30,500 (including catch-up) plus the $33,206 employer contribution means a maximum contribution of $63,706.  TurboTax will not flag an excess employer contribution that you enter, but it will limit the deduction to $63,706 under the assumption that $30,500 of it is actually elective deferral and not employer contribution.

[parikh2us]

Thank you for your response.  It's very clear.  I appreciate it very much.