topic Solo 401k contributions in Business & farm

Solo 401k contributions

cmallow17 — Wed, 13 Nov 2024 23:39:51 GMT

Hi there! Thanks for this event.

I am self employed with a sole proprietorship. If I contribute to a solo 401K, will that help to lower my self-employment taxes? If so, do I need to make an employee or an employer contribution?

Thank you!

Re: Solo 401k contributions

ScottT3 — Wed, 13 Nov 2024 23:45:33 GMT

Hi there!

According to 2024 IRS 401(k) and Profit-Sharing Plan Contribution Limits, as an employee, you can make salary deferral contributions equal to the lesser of $23,000, or 100% of your compensation.

Re: Solo 401k contributions

ScottT3 — Wed, 13 Nov 2024 23:48:51 GMT

You do have to be careful, however. Sole proprietors (Schedule C filers) cannot pay themselves a salary. Your net profit is considered your salary. If you elected S-Corporation treatment, it would be a different story.

Re: Solo 401k contributions

cmallow17 — Wed, 13 Nov 2024 23:56:25 GMT

Hi Scott,

Thanks for your reply. So an employee contribution to my solo 401k would not result in a lower net profit, correct?

I’m looking to optimize the Self Employment tax bill. Thanks!

Re: Solo 401k contributions

ScottT3 — Thu, 14 Nov 2024 00:11:32 GMT

You can make retirement contributions from net profit, yes.

This is an older IRS Fact Sheet, but a useful one.

https://www.irs.gov/pub/irs-news/fs-08-24.pdf

Re: Solo 401k contributions

VolvoGirl — Thu, 14 Nov 2024 02:18:29 GMT

But right, it won't reduce your Net Profit and reduce your self employment tax.

Re: Solo 401k contributions

ScottT3 — Fri, 15 Nov 2024 17:36:32 GMT

VolvoGirl is correct.

As a Schedule C filer, self-employment tax stands on its own (based on net profit). You're certainly free to contribute to a Solo 401(k) but the self-employment tax is unaffected (since you can't pay yourself a salary).

You might want to consider electing S-Corporation treatment for this reason.

Re: Solo 401k contributions

cmallow17 — Sat, 16 Nov 2024 03:04:14 GMT

Thank you, Scott, for the advice and clarification!

Re: Solo 401k contributions

cmallow17 — Sat, 16 Nov 2024 03:04:29 GMT

Thank you, VolvoGirl!