CORPORATION: Calculating My Solo 401k contributions for a Corporation

For incorporated business owners, Solo 401k contributions will generally be based on the  business owner's compensation, which is often defined as Social Security wages (as reported on IRS Form W-2). However, incorporated business owners should be sure to understand the definition of compensation within their plan documents, as the definition of compensation can vary slightly from one plan document to the next. Remember that the maximum Solo 401k contribution is comprised of two components: an employer profit sharing contribution and an employee salary deferral contribution.   

NOTE: Owners of Subchapter S corporations must base their contributions on Form W-2 income and may not base Solo 401k contributions on pass-through profits.

Once the incorporated business owner's compensation is determined (or estimated in the case of advance planning), the maximum Solo 401k contribution may be determined as follows, based on 2010 an 2011 limitations.

Step 1: Determine maximum profit sharing contribution
            maximum profit sharing contribution = .25 x compensation

Step 2: Determine maximum salary deferral
         maximum salary deferral = lesser of $17,000, or
                                                  compensation-maximum profit sharing contribution

Step 3: Calculate maximum Solo 401(k) contribution
            maximum Solo 401(k) contribution = maximum profit sharing contribution
                                                                      + maximum salary deferral

NOTE: The maximum Solo 401(k) contribution for 2012 may not exceed $50,000 (unless your age 50 or older and therefore qualify for an additional $5,500 of catch-up contributions)

SOLE PROPRIETOR: Calculating My Solo 401k contributions for a Sole Proprietor

Sole Proprietor Solo 401(k) Calculation
Once the net profits have been calculated on the Schedule C, and the SE tax figures have been determined (or estimated in the case of advance planning), the maximum Solo 401(k )contribution may be determined as follows.

Step 1: Determine compensation

a. net profits - 1/2 SE tax = pre-profit sharing deduction compensation

b. pre-profit sharing deduction compensation          = compensation
     1 + contribution rate expressed as a decimal
                            (.25 is the maximum)

Step 2: Determine maximum profit sharing contribution
            maximum profit sharing contribution = .25 x compensation

Step 3: Determine maximum salary deferral
         maximum salary deferral = lesser of $16,500, or
                                                  compensation-maximum profit sharing contribution

Step 4: Calculate maximum Solo 401(k) contribution
            maximum Solo 401k contribution = maximum profit sharing contribution
                                                                      + maximum salary deferral

NOTE: The maximum Solo 401k contribution for 2011 may not exceed $49,000 (unless your age 50 or older and therefore qualify for an additional $5,500 of catch-up contributions)

Breakdown of Solo 401k Contribution Calculation

When it comes to determining the maximum amount that, as self-employed, you can contribute to Solo 401k or Individual 401k, the process is for the most part straight forward. The main thing to keep in-mind is that the calculation is somewhat different depending on whether you are a sole proprietor, corporation or partnership entity type.

Sole Proprietor and Partnerships

 Sole proprietors,  to calculate the maximum contribution, use your net profits from IRS Form 1040, Schedule C, and subtract 1/2 of self-employment (SE) using Schedule SE. Alternatively, once you determine net profit figure on Schedule C, plug this numer into our online Solo 401k calculator which will automatically reduce the 1/2 of self-employment tax and then provide your maxium Solo 401k contribution. Here's the link to our online solo 401k calculator:
http://www.mysolo401k.net/solo401kcontributioncalculator.html           
  
For partnerships,  use each partner's net profits to calculate the maximum Solo 401k contribution. Each partner's profits are reported on IRS Form 1065, Schedule K-1, and each partner's SE taxes as determined on IRS Form 1040, Schedule SE. The annual  Solo 401k contribution is made up of two figures: an employer profit sharing contribution and an employee salary deferral contribution. In our next blog we will give examples of estimated calculation for a sole proprietor and a partnership.

Our online solo 401k contribuiton calculator can also be utilized for calculating contribution for partnerships. See link above.