Hi there! Thanks for this event.
I am self employed with a sole proprietorship. If I contribute to a solo 401K, will that help to lower my self-employment taxes? If so, do I need to make an employee or an employer contribution?
Thank you!
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VolvoGirl is correct.
As a Schedule C filer, self-employment tax stands on its own (based on net profit). You're certainly free to contribute to a Solo 401(k) but the self-employment tax is unaffected (since you can't pay yourself a salary).
You might want to consider electing S-Corporation treatment for this reason.
Hi there!
According to 2024 IRS 401(k) and Profit-Sharing Plan Contribution Limits, as an employee, you can make salary deferral contributions equal to the lesser of $23,000, or 100% of your compensation.
You do have to be careful, however. Sole proprietors (Schedule C filers) cannot pay themselves a salary. Your net profit is considered your salary. If you elected S-Corporation treatment, it would be a different story.
Hi Scott,
Thanks for your reply. So an employee contribution to my solo 401k would not result in a lower net profit, correct?
I’m looking to optimize the Self Employment tax bill. Thanks!
You can make retirement contributions from net profit, yes.
This is an older IRS Fact Sheet, but a useful one.
https://www.irs.gov/pub/irs-news/fs-08-24.pdf
But right, it won't reduce your Net Profit and reduce your self employment tax.
VolvoGirl is correct.
As a Schedule C filer, self-employment tax stands on its own (based on net profit). You're certainly free to contribute to a Solo 401(k) but the self-employment tax is unaffected (since you can't pay yourself a salary).
You might want to consider electing S-Corporation treatment for this reason.
Thank you, Scott, for the advice and clarification!
Thank you, VolvoGirl!
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