Solo 401k profit sharing amount confusion

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Topic Author
Sole Proprietor
Posts: 2
Joined: Sun Dec 27, 2020 3:37 pm

Solo 401k profit sharing amount confusion

Post by Sole Proprietor »

I'm a bit confused about how much I can contribute as an employer for the profit sharing portion of my solo 401k.

I know that as a sole proprietor, I can contribute 20% of my net self-employment income, which is my business net profit minus half of my self-employment tax and the plan contributions I made for myself.

However, I’ve tried out a number of solo 401k calculators online, and none of them seem to be able to take employee contributions into account when calculating the maximum profit sharing amount.

Are all of the calculators really wrong, or am I missing something?

If my net self employment income was, say... $100k, and I contributed the maximum $19.5k to my solo 401k as an employee, wouldn't the maximum profit sharing contribution be calculated based on 20% of $73,435.22? ($100,000 -$7,064.78 self-employment tax -$19,500 contributions made as an employee = $73,435.22).

Meaning I should be able to contribute a maximum of $14,687.04 as an employer?

All of the many solo 401k calculators I checked show $18,587.05 for the employer maximum, which is 20% of the net income minus half of self-employment tax ($100,000 - $7,064.78), without considering contributions.

If anyone could help confirm my understanding regarding how much can actually be contributed as a sole proprietorship, I'd really appreciate it. Thanks!
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FelixTheCat
Posts: 2003
Joined: Sat Sep 24, 2011 12:39 am

Re: Solo 401k profit sharing amount confusion

Post by FelixTheCat »

I used the calculators for my employer contributions. The contribution amount was verified when I did my taxes via Turbotax.
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Topic Author
Sole Proprietor
Posts: 2
Joined: Sun Dec 27, 2020 3:37 pm

Re: Solo 401k profit sharing amount confusion

Post by Sole Proprietor »

But the calculators (Bankrate, Oblivious Investor, solo401k.com, etc) don't have a way to subtract the employee contributions before calculating the maximum employer contribution... Isn't that wrong?

From the IRS website, it says:

To calculate your plan compensation, you reduce your net earnings from self-employment by:
  • the deductible portion of your SE tax from your Form 1040 return, page 1, and
  • the amount of your own (not your employees’) retirement plan contribution from your Form 1040 return, page 1, on the line for self-employed SEP, SIMPLE, and qualified plans.
Source: https://www.irs.gov/retirement-plans/se ... -deduction
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