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Solo 401k Contribution Calculations

Calculations for a sole proprietorship, partnership or an LLC taxed as a sole proprietorship

Salary Deferral Contribution

Although the term salary deferral is used, a sole proprietorship, partnership or an LLC taxed as a sole proprietorship do not provide a W-2 salary to the business owner. As a result, the salary deferral contribution is based on net adjusted business profit. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self employment tax. In 2017, 100% of net adjusted business profits income up to the maximum of $18,000 or $24,000 if age 50 or older can be contributed in salary deferrals into a Solo 401k (2016 limits are $18,000 and $24,000 if age 50 or older).

Profit Sharing Contribution

A profit sharing contribution can be made up to 20% of net adjusted businesses profits. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self employment tax. You will want to ask your tax professional for assistance with this calculation.

  • EXAMPLE 1
    A sole proprietor is age 50 and works as an independent contractor with $50,000 of net income in 2017. In this example, the sole proprietor could contribute $24,000 of salary deferrals + $9,294 profit sharing contribution = $33,294 total Solo 401k contribution.
  • EXAMPLE 2
    A sole proprietor is age 50 and works as an independent contractor with $100,000 of net income in 2017. In this example, the sole proprietor could contribute $24,000 of salary deferrals + $18,587 profit sharing contribution = $42,587 total Solo 401k contribution.

In the examples above, salary deferral and profit sharing contributions are generally 100% tax deductible from personal income.

Summary:

Generous Solo 401k contribution limits and the favorable way the annual contribution is calculated compared to other self employed retirement plans are attractive features of the Solo 401k.

Learn more about the benefits of a Solo 401k.

Solo 401k Calculator

To determine the annual retirement contribution you could make based on your income use the Solo 401k calculator.

 

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Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.