Solo 401k maximum contribution limit not including W-2 income

[Eduardo66]

Hello,

After entering my wife ($20,500) and mine ($27,000) Solo 401k contributions  in the "Individual and Roth 401(k) plans section" and then selecting Maximize Contribution to Individual 401(k), it is calculating my wife max allowed to qualified plans as $0 and indicating that the difference must be withdrawn by plan due date.

My wife owns the company, sole proprietary, she and I (spouse) are the only employees of the company, so we can contribute to the Solo 401(k) based on the W-2s the company paid to us, but it seems Turbo tax is not including those W-2 incomes in the calculations. It is just using a 1099-NEC for me, which is a different income I have, and no income for my wife. Why are W-2 not being considered? Should I add them into the "Adjusting Self-Employment Income" screen?

[AliciaP1 · Accepted solution]

Elective deferral contributions need to be withheld from the payroll reported on a W2, not reported after.  You can only deduct self-employment retirement contributions for non-w2 self-employment income.  Also, if your wife owns the company and is issuing herself a W2, I'm assuming your wife's business is reporting as an S-Corp for tax purposes.  You need to also enter the Schedule K-1 from her business' Form 1120S into your personal tax returns.

To get the contributions entered and receive the deductions, you will need to issue corrected W2s and a corrected business tax return for any employer or profit-sharing contributions made.  Then enter the corrected W2s and Schedule K-1 to properly calculate your taxes.

[Eduardo66]

Thank so very much for your answer. 

Correct, my wife company is an S-Corp. We already filed the 1120S and entered the Schedule K-1 in our personal taxes.

But it seems I got the wrong information when we opened our Solo 401K accounts this year 2023 to take advantage of the 2022 deductions. In other words, our 401(k) accounts was opened this year 2023 and then we made the total contributions with a single  payment, not as deductions from paychecks that will appear in our W-2. I don't think I can change/correct the W-2s? Can I? Am I losing the deductions?

I really appreciate your help on this, thank you.

[dmertz]

Under the circumstances, only an employer profit-sharing contribution is permitted, not an elective deferral or Roth contribution.

Only sole proprietors can make the deferral election after the end of the year and only for the first year of the solo 401(k) plan, but only for plan years beginning after 2022.  Shareholders in an S-corp are employees of the S-corp, not sole proprietors, so the elective deferrals are excess contributions.  Also, your plan was established for 2022, so even if you were a sole proprietor you couldn't do this.

Elective deferrals made in excess of the permissible amount are subject to a 10% penalty on Form 5330 unless a return of the excess contribution is made by April 18, 2023.  TurboTax does not support the preparation of Form 5330.

[Eduardo66]

Sorry, I was wrong. 

The Solo 401k was set last year (2022) and the contributions were also done last year, in December 2022, as a single contribution, not as part of our W-2 as deductions through the year.

How do I enter this information in TurboTax?

[Eduardo66]

A TurboTax expert helped me to fix this. In fact, there is a problem with TurboTax not properly handling Solo 401(k) contributions. The work around is to add the W2 income in the adjust self-employment section

[dmertz]

Unless you are talking about two different companies that your wife participates in, it's clear from the totality of your posts that the company is an S-corp and your statement in the original question that your wife is a sole proprietors is incorrect.  

A shareholder in a S-corp is not permitted to claim a self-employed retirement deduction on their individual tax return (or take any other deduction for contributions to the solo 401(k), so it seems whatever the TurboTax expert said to do to report this contribution on your individual tax return is incorrect.  Any elective deferrals by the shareholder must be made from pay, reported with code D in box 12 of the shareholder's W-2 and excluded from the amount that would otherwise be present in box 1 of the W-2.  These contributions are deductible on the S-corp's tax return, not on the individual's tax return.

Entering the amount contributed as income from self-employment is wrong.  Shareholders in an S-corp are not self employed.  You need to undo that.  As AliciaP1 said, it seems that you need to amend your Form 1120-S, issue corrected Schedules K-1, and, if the contributions included elective deferrals or Roth contributions, correct the Forms W-2.