How to tell Turbotax employer contribution to solo 401k is Roth?

[RobertB4444]

You have until the due date of the tax return to make any contributions to retirement accounts for 2023.  Just make certain that the contributions are classified as 2023 contributions.

@dc20222023 

[Tax2024]

Expert:

please confirm this is still the case after recent security act 2 clarity: 

“Under the SECURE Act 2.0, the employer Roth 401(k) do not affect your personal taxes, which is what this screen is for.  You need to enter the employer contribution as an expense within your business expenses to get the business deduction you are allowed now.  Don't forget that employer Roth 401(k) contributions result in taxable income when distributed, even though it comes from a Roth 401(k).

To enter the employer match contribution amount in TurboTax Home & Business you can follow these steps:

1. Within your tax return under the Businesstab click Continue and I'll choose what I work on
2. Click Update for Business Income and Expenses
3. Click Edit for the business the contribution is for
4. Enter the contribution amount as Other Miscellaneous Expenses under Other Common Business Expenses”. 

[Tax2024]

Hi Alicia,

Could you Please confirm this is still the case after recent security act 2 clarity: 

“Under the SECURE Act 2.0, the employer Roth 401(k) do not affect your personal taxes, which is what this screen is for.  You need to enter the employer contribution as an expense within your business expenses to get the business deduction you are allowed now.  Don't forget that employer Roth 401(k) contributions result in taxable income when distributed, even though it comes from a Roth 401(k).

To enter the employer match contribution amount in TurboTax Home & Business you can follow these steps:

1. Within your tax return under the Businesstab click Continue and I'll choose what I work on
2. Click Update for Business Income and Expenses
3. Click Edit for the business the contribution is for
4. Enter the contribution amount as Other Miscellaneous Expenses under Other Common Business Expenses”. 

[dmertz]

AliciaP1's reply cannot possibly be correct given the recent IRS guidance regarding Roth employer contributions.  That guidance makes the Roth employer contribution taxable to the employee in the year that the deposit by the employer is made, not some future year, so there is no special tracking of the Roth employer contributions to make them taxable when distributed.

IRS Guidance (see Q&A L-9):  https://www.irs.gov/pub/irs-drop/n-24-02.pdf

Interpreting this IRS guidance, for a Roth employer contribution to a solo 401(k) for 2023 deposited in 2024, I would expect that it would be necessary to report the employer contribution as a traditional 401(k) employer contribution included in the self-employed retirement deduction on 2023 Schedule 1 line 16, and then report a 2024 In-plan Roth Rollover by providing to yourself (as both employer and employee) and to the IRS a 2024 Form 1099-R with the employer contribution amount in boxes 1 and 2a and code G in box 7, making it taxable on your 2024 tax return.  Consistent with the IRS guidance for Roth employer contributions, this results in the Roth employer contribution being taxable to the self-employed individual on the tax return for the year in which the deposit is made.

For a solo 401(k) providers that have a plan agreement that allows Roth employer contributions, I might imagine that the provider would issue on behalf of the employer the Form 1099-R required to report the In-plan Roth Rollover.  Contact your solo 401(k) provider for more information.

[Tax2024]

I understand everything you said. But was hoping this Roth employer contribution excluded from FICA from employer level (which is only 7.65%) which will be reported on schedule C as a business expense. It is taxable income personal level regardless. 

[dmertz]

With respect to the determination of self-employment tax, there is no reason to expect that a Roth employer contribution would be any different than a traditional employer contribution.

[dc20222023]

When calculating the employee roth 401 contribution LIMIT, do we need to minus 50% of the self-employment tax or just 100% of the net profit (schedule line 31)? I have another trading business to write off all the self-employment income so I don't have SE tax to pay.

[Tax2024]

This has been a hot argument if the solo 401k roth contrubution is a business expenses or not. CPAs are not clear either. 

[dmertz]

Total 401(k) contributions are never permitted to exceed net earnings as defined for this purpose.  Net earnings are defined as net profit (Schedule C line 31) minus the deductible 50% of self-employment taxes.

If your net profit of the two businesses combined is zero or less, you have no net earnings to contribute to a 401(k).

[dc20222023]

I also have w2 (not my company) income and trading income that the trading expense can offset. Does the trading expense have to offset self-employment income first? Then hypothetically if my business lost a lot of money later in the year, I have to return my 401k contribution made through my w2 (not my company) job?

[dmertz]

W-2 income and the self-employment net profit or loss are independent of each other.

Note that your securities trading is only self-employment business if you meet the definition of a trader:

https://www.irs.gov/taxtopics/tc429

[dc20222023]

But the trading business (trading income is not earned income) and my other LLC are two separate businesses. Is there anywhere on the IRS website saying when contributing to solo 401K for one business, I have to see if other businesses made money or lost money and calculate as a whole? If my other businesses make money, even they don't have solo 401k, I can contribute more to the other business's 401k?

[dmertz]

"But the trading business (trading income is not earned income) and my other LLC are two separate businesses."

If your businesses are under common control (which they would be if you are the sole owner), they are treated as a single business for the purpose of retirement contributions.  See section 414(c) of the tax code.