When we calculate "net income" of the S-Corp, do we take out "Profit sharing contribution 25%" as deduction?

Question

I am trying to understand the "net income" for S-Corp (in case of opting for Solo 401(k).

When we calculate "net income" of the S-Corp, do we take out "Profit sharing contribution 25%" as deduction?

For example: Let us say I have "one member" S-Corp with 100K Gross income, I am trying to maximize

• Solo 401k

• Employer profit sharing contribution

• Voluntary after-tax contributions

All of these "items" are dependent on "net income", which means I need to deduct "all the expenses" to identify what would be "reasonable salary". Seems like Chicken egg problem.

Above 100K example, following 60/40 rule, if I take "salary" as 60k.

• Salary - $60,000
• 7.5% of tax is one deductible - $4,500
• Other business expenses - $5,000
• 401k employer contribution (25% of salary) - $15,000

Around $85,000 is total, which leaves $15,000. Now the confusion is, should I use this remaining amount ($15,000 - personal tax) to contribute towards "Voluntary after tax deduction" (or) I can contribute to "Voluntary after tax deduction" from the salary ($60,000 - personal tax)?

Anything else I can fine tune in this so I can maximize contributions towards savings (Both pre-tax and after-tax). Appreciate your suggestions!

Answer 1

When we calculate "net income" of the S-Corp, do we take out "Profit sharing contribution 25%" as deduction?'

Yes. 401k contributions are deductible to the employer and are (deferred) taxable income to the employee.

---

You should probably talk to a licensed tax professional (EA/CPA/Attorney in your State) for proper tax planning. There are certain advantages and disadvantages to various different choices that can bite or benefit you later depending on your circumstances and business plans.

You should also check the IRS publication 4806.