☰
✕
Sign In

Why sign in to the Community?

  • Submit a question
  • Check your notifications
Sign in to the Community or Sign in to TurboTax and start working on your taxes
Level 2
posted Nov 30, 2023 7:57:39 AM

Solo 401k Maximum amount allowed for Employer Contribution

I get paid as an Independent IT/Management contractor directly in my bank account for a European based Startup. [ I do not get 1099 as its a European startup with nothing in US]

 

I will report this in Schedule C. 

I have opened a SOLO 401k with Nabers group

 

Lets say my income is 100,000 [ no expense incurred - this is total what I get in my account at the end ]

I can pay as an employee 22,500

Question 1

What do I pay as maximum as an employer ?

Is it [100000 - (15.3*.05*100000) ] * 20%   ?

Is it [100000 - (15.3*.05*100000) ] * 25%   ?

Is it [100000 - (15.3*.05*100000)  -22500 ] * 20%   ?

Is it [100000 - (15.3*.05*100000)  -22500] * 25%   ?

 

 

 

0 3 606
3 Replies
Level 15
Nov 30, 2023 9:49:18 AM

@dmertz 

Expert Alumni
Nov 30, 2023 10:21:35 AM

Here are the steps to calculate your maximum solo 401(k) contribution:

 

  1. Gross profit (income less all other business expenses) - here we will use the round number of $100,000 .  $100,000 * .9235 [this number comes from Schedule SE, the simplest way to start this process]     Result here is $92,350  You can go through Schedule SE here which I find a very helpful exercise to get started.
  2. $92,350 *.153 (the full SE tax rate)  Result here is $14,130.  This is the actual SE tax that you'll pay.
  3. $14,130/2 = $7065 (half of the actual SE tax)  (CAUTION: this is a different number than you'll get if you multiply 100,000 times half of the SE tax rate (.0765) though the numbers look very similar in this example.)
  4. $100,000-$7065 (half of the actual SE tax)  = $92,935  
  5. $92,935 *.20 In your case.   The .20 is derived by taking the plan contribution rate (.25) and dividing it by 1+contribution rate, so .[25/1.25], which gives us 20% here.  
  6. Employer contribution is then $18,587
  7. Total $18,587+$22,500= $41,087

For this example, I assumed that you are under age 50 and not eligible for any catchup contributions. 

TurboTax will help you calculate based on your final numbers. There are also a number of solo 401(k) calculators on the internet which can be helpful to verify your calculations.
 

 

Level 15
Nov 30, 2023 12:50:20 PM

SusanY1's fine answer assumes that you have no compensation at a W-2 employer that would, when combined with your self-employment earnings, would take you over the Social Security wage limit.  If you do go over the wage limit, your self-employment tax would be less, making your allowable employer contribution slightly more.