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Level 4

Solo 401k elective deferrals benefits vs. contributing as employee after payroll.

What are the benefits of setting up elective deferrals for a solo 401k vs. contributing as an employee after payroll has been completed? Is there any difference as far as tax deductions, etc?

 

Much thanks!

3 Replies
Level 20

Solo 401k elective deferrals benefits vs. contributing as employee after payroll.

What kind of business entity do you own (sole proprietorship, S corp, etc.)?

Do you have employees other than yourself, your spouse and other owners of the business?

Level 4

Solo 401k elective deferrals benefits vs. contributing as employee after payroll.

I have an S-Corporation. I am the only employee.

Level 20

Solo 401k elective deferrals benefits vs. contributing as employee after payroll.

Both the elective deferral and employer contributions must be deposited by the S corp or the S corp's representative, say, a payroll company.  Elective deferrals come from your wages whether done from regular periodic pay through the payroll company or deposited by you (as employer).  Either way, the total amount of your elective deferrals is excluded from the amount in box 1 of your W-2 but included in box 3 (up to the Social Security wage base amount) and box 5, and reported with code D in box 12 of your W-2.  Whoever prepares your W-2 needs to know the total amount of elective deferrals so that they can prepare the W-2 correctly.  It's seems simplest to just let the payroll company make the deposits from your pay each pay period.  Of course as the owner and only employee, you control your pay schedule.

 

The elective deferrals are part of the deductions claimed on the S corp's tax return.

 

The only real difference in how the deposits are made may be in the timing of the deposits.  The Department of Labor requires that the deposits be made in a timely fashion, generally no later than the 15th day of the month following the month of the pay period.