Need Help with how to calculate contributions to Solo 401K (employee + employer)

Anonymous — Wed, 27 Oct 2021 17:12:10 GMT

Hello,

I have an LLC as a sole proprietor with only myself in the business. I need help with two scenarios, and I'm trying to understand how to calculate the employee ($26,000) and employer (20%) possible funds for my Solo 401k. I will use easy numbers in my examples, as I'm looking for the general answer to how to do the math, not looking for exact math with actual amounts.

Scenario 1: Year 2021
I have W2 income of $250,000 for 2021, and no longer need to pay Social Security taxes. I've also maxed out my employee contributions to a 401k. Thus, all income earned from my LLC will be at the the 35% income bracket, with only the 2.9% Medicare tax. For simplicity, let's just round that up to 38% in taxes. From my LLC, let's say I earned $10,000 for 2021 and had $2000 in business expenses. I can't contribute to my solo 401K as an employee, but I can contribute as the employer at the 20% rate (from what I gather). I don't know what number to use to do this math. Is it gross income (10k), or is it gross income minus expenses... and is it 20% before taxes or after taxes?

Scenario 2: Year 2022
I'd like to contribute to my solo 401K as I earn money throughout the year. In this year, I anticipate to make about 100K, so will eventually end up in the 22% income tax bracket. Let's estimate about $2500 in business expenses. I know that my federal tax rate will change over time as the year progresses. I will also be paying the full 12.4% rate for Social Security and the full 2.9% Medicare rate, so 15.3% total for those. I'm 52, so I want to contribute the full 26K as the employee, plus the 20% for the employer side.

Questions:

- If I want to make contributions monthly, what is the math to use to calculate the employee contribution? Is the contribution taken from the gross amount before taxes, like it was when I earned money from W2 work?

- What math do I use to calculate the 20% employer contribution? Is this also before taxes, or is it after taxes? Is it before expenses, or after?

Thank you so much for your help!
Sonia

Re: Need Help with how to calculate contributions to Solo 401K (employee + employer)

conniem123 — Wed, 27 Oct 2021 18:43:23 GMT

Here is a great tool to calculate your maximum plan year contribution, for your different scenarios.

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/401k-self-employed-owner-only-business.pdf

Also the IRS site has the contribution limits for the different plans.

https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people

I hope you find this information helpful!

Re: Need Help with how to calculate contributions to Solo 401K (employee + employer)

Anonymous — Wed, 27 Oct 2021 19:08:36 GMT

Thank you, I will check out these resources.

topic Need Help with how to calculate contributions to Solo 401K (employee + employer) in Self employed

Need Help with how to calculate contributions to Solo 401K (employee + employer)

Re: Need Help with how to calculate contributions to Solo 401K (employee + employer)

Re: Need Help with how to calculate contributions to Solo 401K (employee + employer)