Hello, I recently started a small side business where I complete psychological evaluations. I believe i understand a bit about the Solo 401k option, but I want to get things right.
I’m not positive how much I will make this year, but it will be under the $22,500 limit. If for example I bring in $10,000 in payments, I know the employee side of 401k I can contribute $10,000.
But for the employer side of 401k, it sounds like I can contribute 25% of the profit. It seems that I would deduct expenses (equipment, etc let’s say that is $2000) from the $10,000, leaving $8000, and 25% would be $2000 I can contribute as the employer.
Does that sound correct? Seems odd to be able to contribute $12000 in these two accounts when I only billed for $10,000.
One final point is the spouse 401k. She is helping with the business, does that mean I can contribute the same for her as I did for me? So $10,000 in employee account and $2000 in employer account.
Seems too good to be true for contributing $24,000 total between us with only $10,000 in revenue.
Since you say ‘side business’, I assume you are also employed elsewhere? If so, are you contributing to an employer plan at that job? That limits any solo 401(k) contributions as the employee. And I don’t think that you really understand the solo 401(k) rules. You might want to start here One Participant 401k Plans | Internal Revenue Service (irs.gov)
Not exactly. If you are contributing to another employer’s plan, your total employee contributions between the two plans can be no more than the $22,500 limit (plus catch-up if 50 or older). So, if you are maxing out another plan, you cannot make a solo 401(k) contribution as the employee.
Well, if you are able to make any employee contributions, the compensation that you pay yourself to make that contribution is an expense, too. So in your example where you make a employee contribution $10,000, your company would have equipment, etc. expenses of $2,000 and compensation expenses of $10,000, against revenue of $10,000, for a net loss, not a profit. Additionally, you would have to pay self-employment taxes (both sides of SS & Medicare) on your compensation, and when calculating the employer contribution, you have to subtract 50% of the self-employment taxes as an expense, too.
If she’s not maxing out another another employer’s plan and has $10,000 left in her contribution limit, you would have to pay her $10,000, plus pay the employment taxes on that compensation, further increasing your loss, which would mean that there would definitely be no employer contribution allowed.