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 $61,000 for 2022 and $66,000 for 2023 to a company 401k plan.

Participants age 50 or older may add an additional $6,500 catch-up contribution for 2022 and an additional $7,500 catch-up contribution for 2023. 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

  • 2022

    • $61,000

    • $67,500 for those age 50 or older

  • 2023

    • $66,000

    • $73,500 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 2022, you can contribute a maximum of $20,500 as an employee salary deferral contribution. For 2023, the maximum employee contribution is $22,500.

Employee contributions can be up to 100% of your net compensation. Therefore, if you were compensated $20,000 from your business in 2022, 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 2022

  • $20,500 - 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

  • $20,500 + $30,000 = $50,500 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

  • 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

  • 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

  1. Determine contribution amount

  2. Determine contribution type (pretax/Roth/employer/employee)

  3. Complete a contribution form

  4. Move funds from business or personal account to Solo 401k bank/brokerage account

    1. 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)

    2. Employer profit-sharing contributions come from the business bank account since the company contributes on your behalf

    3. Keep Pre-tax money in pre-tax bank/brokerage account and Roth contributions in Roth bank/brokerage account

    4. Never mix Pre-Tax and Roth in one bank account

    5. 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 Your Solo 401k Contribution form here

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.

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.

Did this answer your question?