Solo 401k contributions

Forum|Forum|1 year ago
November 13, 2024
1 reply
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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!

Ask the Experts - Biz Tax Moves - Nov 2024

Best answer by ScottT3

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.

ScottT3

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.

ScottT3

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.