What is a Contribution?
Contributions are a way to fund your retirement plan based on your earned compensation from your small business. All compensation paid to you that will be contributed to a retirement plan is subject to self-employment taxes or payroll taxes.
Contribution Maximums
The IRS allows a maximum contribution per taxpayer of $66,000 for 2023 and $69,000 for 2024 to a company 401k plan.
Participants age 50 or older may add an additional $7,500 catch-up contribution for 2023 and 2024. Since all contributions are based on your compensation, you cannot contribute more than you earn. All contributions must be made in USD (cash).
Total Allowable Contribution Amounts
2023
$66,600
$73,500 for those age 50 or older
2024
$69,000
$76,500 for those age 50 or older
What are the types of Solo 401k Contributions?
Employee Salary Deferral Contributions
Employee salary deferral contributions are funds are "deferred" from being sent to you as direct compensation and are instead put into your retirement plan. In essence, you're deferring part of your salary by putting it in a 401k.
Employee salary deferral contributions can be pre-tax or Roth. In 2023, you can contribute a maximum of $22,500 as an employee salary deferral contribution. For 2024, the maximum employee contribution is $23,000.
Employee contributions can be up to 100% of your net compensation. Therefore, if you were compensated $20,000 from your business in 2023, you can contribute the entire amount tax-deductible (pretax) or tax-free (Roth).
Employer Profit-Sharing Contributions
Employer profit-sharing contributions are funds paid from the employer into your retirement plan on your behalf. In the case of a Solo 401k, the employer is you (and you're the employee, too). Employer contributions are pre-tax only (not Roth) since the employer will use these contributions as a tax-deduction for the company.
Employer contributions can be a maximum of 20-25% of your compensation, depending on your business structure:
Sole proprietorship & Single-member LLC: 20% of compensation
Multi-member LLC, Partnership, S-Corp & C-Corp: 25% of compensation
Voluntary After-Tax Contributions
Voluntary after-tax (VAT) contributions are a special type of employee contribution that is not a salary deferral. VAT contributions can be up to 100% of your compensation, up to the allowable maximum.
Many investors use after-tax contributions to participate in the Mega Backdoor Roth Strategy - a way to supercharge the amount of funds you can legally put into a Roth structure.
Calculating Your Contribution
Use our Contribution Calculator to input your net compensation and obtain your ballpark contribution amount. Always share these figures with your CPA to verify your calculations are correct.
Simplified Contribution Examples
John's Sole Proprietorship Earns $150,000 in 2023
$22,500 - Pre-Tax employee salary deferral contribution
100% of net comp up to $20,500
$30,000 - Pre-Tax Employer profit sharing contribution
20% of $150,000
$22,500 + $30,000 = $52,500 Total Contribution
100% tax deductible
Alex's S-Corp Pays Him $85,000 in W2 Wages in 2023
$22,500 - Roth employee salary deferral contribution
100% of W2 wages to $22,500
$21,250 - Pre-Tax Employer profit sharing contribution
25% of $85,000
$22,250 - Voluntary after-tax contribution
100% of net comp up, not to exceed overall maximum
$22,500 + $21,250 + $22,250 = $66,000 Total Contribution
$22,500 Roth
$21,250 Pre-Tax (tax deductible for S-Corp)
$22,250 After-tax and can be converted to Roth
Examples are provided for illustration purposes only.
Compensation Rules by Business Type:
How much you can contribute is directly correlated to how much you are compensated by your small business or self-employment earnings.
Sole Proprietorship
Your contributions are based on Line 31 of the Schedule C (Profit & Loss from a Business) of your 1040 Tax Form
Single-member LLC
Your contributions are based on Line 31 of the Schedule C (Profit & Loss from a Business) of your 1040 Tax Form
Multi-member LLC or Partnership
Your contributions are based on Line 14 of the Schedule K-1 (Profit & Loss from a Business) of your 1065 Tax Form
Subchapter S-Corporations (S-Corp)
You can only contribute income that is reported on your W-2
Compensation from owner K-1 distributions from your 1120-S may not be included in your contribution calculation or contribution deposit
C-Corporation (C-Corp)
Your contributions are based on your W2 wages from your corporation
How to Make Contributions
Determine contribution type (pretax/Roth/employer/employee)
Move funds from business or personal account to Solo 401k bank/brokerage account
Employee salary deferral contributions can come from your personal bank account (since you would have received this payroll before you "defer" it into your 40k)
Employer profit-sharing contributions come from the business bank account since the company contributes on your behalf
Keep Pre-tax money in pre-tax bank/brokerage account and Roth contributions in Roth bank/brokerage account
Never mix Pre-Tax and Roth in one bank account
Have an extra bank account for VAT if you plan to make after-tax contributions
Contribution Deadlines
Do I have to contribute before December 31st?
The IRS wants you to formally elect contributions by 12/31, but the funds themselves can be deposited up until you file taxes for your small business, including extensions.
How to "Formally Elect" a Contribution
Elective salary deferrals (employee contributions) must be formally elected by December 31st. The actual deposit may be made by the "due date of employer's return (including extensions)" (IRS Source)
Formal election simply means you are documenting that you plan to make elective deferrals into your plan, and typically are documenting how much you plan to contribute.
Complete the contribution form by December 31st of each year. Keep a copy for your records, and share a copy with your CPA. Your contribution form does not need to be sent to Nabers.
If you complete the formal election by December 31st of each year, you have until you file your tax returns for the following year to make the deposit.
Where to Report Contributions on Your Tax Return
Sole proprietorship + Single-member LLC:
Report both the employer and employee contribution on Schedule 1, Line 16 of the IRS tax form 1040
Multi-member LLC/Partnership:
Report both the employer and employee contribution on Line 18 of the 1065 partnership return
S-Corp:
As an employee of the corporation, report your personal contribution to the Solo 401k in box 12 of your W-2.
List the business portion of the Solo 401k contribution on line 17 of the 1120S.
C-Corp:
As an employee of the corporation, report your personal contribution to the Solo 401k in box 12 of your W-2.
List the business portion of the Solo 401k contribution on line 23 of the 1120
Please note: IRS tax forms can change from year to year and the Line or Schedule may vary. Please work with your CPA to ensure contributions are properly reported.
Do Rollovers Affect Contribution Amounts?
No, you can rollover any amount at any time into your Solo 401k plan. Funds you roll over into a Solo 401k do not count against or reduce yoru contribution amount. Contributions are solely based on your compensation from your small business.