solo 401k

[hesformes]

My understanding is that with a solo 401k, I can contribute 23k plus 7500 catch up, as the employee. How much can I contribute as the employer? If I check the "Maximize individual contribution to 401k" box, will that include the employer contribution? Thanks

[dmertz · Accepted solution]

TurboTax uses the Deduction Worksheet for the Self-Employed from IRS Pub 560 (called the Keogh, SEP and SIMPLE Contribution Worksheet in TurboTax) to calculate the maximum permissible contribution.  The portion of the deductible amount in excess of the employee regular and catch-up elective deferrals would be the employer contribution.

https://www.irs.gov/publications/p560#en_US_2022_publink10009065

[hesformes]

Thanks. I took a look at that worksheet and it gave the wrong Maximum contribution amount. It didn't account for my SE health insurance premiums, which I put into Turbo Tax. Also it came up with a maximum contribution that didn't correspond to simply adding the amount of my insurance premiums. Very confusing. I'm using the formula you gave me last year of Net profit - health ins premiums - half of SE tax = maximum contribution. I figured that the employer contribution would be maximum contribution - employee contribution, but I wanted to make sure, as what seems sensible isn't necessarily equal to IRS rules.  Do you have any idea why Turbo Tax doesn't figure health insurance premiums into their calculations even when those premiums are specified as a business expense? Has anyone given them feedback on this? Where can I do that?

[dmertz]

The net earnings that remain after the solo 401(k) contributions is what is left to support the SE health insurance deduction, not the other way around.  Also note that net earnings are net profit minus the deductible portion of SE taxes.  In other words, net profit first goes to the deductible portion of SE taxes, then to your solo 401(k) contributions, then to your SE health insurance deduction.  TurboTax does all of these calculations as described by the IRS.

The SE health insurance deduction is a personal deduction, not a business expense.

The one thing that TurboTax does not have the ability to do is to enforce the limit on employee elective deferrals when the individual also makes elective deferrals to another employers plan.  In that case the Maximize function for a 401(k) contribution cannot be used and the limited elective deferral must be calculated and entered manually.

[hesformes]

Looking at the worksheet you provided a link to, I'm thinking that Part III Step 5 is the maximum employer contribution, which is arrived at by multiplying net earnings by .20. That is added to the maximum employee contribution, which is a flat $30,500 (with catch up).  However, I want to deduct my health insurance premiums, as you recommended prioritizing those over the 401k contribution, since I'll never have to pay taxes on insurance deduction. I'm thinking that to maximize my 401k contribution, I need to subtract the insurance from my net earnings, NOT from the maximum amount arrived at on the worksheet, which is smaller. Is that correct? Next year, my insurance premiums will be negligible, so I'm thinking that as long as my premiums are smaller than the difference between net earnings and the maximum 401k contribution as determined on the worksheet, I can simply use the checkbox "maximize 401k contribution" on Turbo Tax and that will finally give me the correct maximum amount without messing with anything else. I'm hoping I finally understand this. Do I get a thumbs up or down? Thanks

[dmertz]

If you have to reduce solo 401(k) contributions to be able to deduct the self-employed health insurance payments, you won't be able to use the Maximize function.  You'll have to make manual entries for the 401(k) contributions, making sure not to exceed any of the amounts that you would be able to contribute if you were not claiming the self-employed health insurance deduction.

[hesformes]

Do I subtract the amount of my health insurance premiums from net earnings or from the maximum contribution amount determined on the worksheet in order to find what I can actually contribute to my 401k?

[dmertz · Accepted solution]

Subtract from net earnings.  (Net earnings are already net profit minus the deductible portion of SE taxes.)  Under these circumstances, you'll want the total of Schedule 1 lines 15, 16 and 17 to equal net profit.

[hesformes]

Thanks