topic Self-employed 401(k) Maximum Employer Contribution in Retirement tax questions

Self-employed 401(k) Maximum Employer Contribution

parikh2us — Sat, 29 Mar 2025 20:45:05 GMT

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.

Re: Self-employed 401(k) Maximum Employer Contribution

dmertz — Sun, 30 Mar 2025 00:45:12 GMT

"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.

Re: Self-employed 401(k) Maximum Employer Contribution

parikh2us — Sun, 30 Mar 2025 13:34:27 GMT

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