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I'm quitting a job at the end of this year. I want to start a solo-401k for all my schedule C income and I have a couple of concerns:

  1. If my employer were to, for some reason, pay me in 2015 some wages with the 401k contribution in it, it would trigger a "participated in employer provided plan" on the 2015 W2. I know this fact imposes income limits on deductible IRA contributions. Does it affect limits of solo-401k contributions at all, other than taking part of the total contribution allowed?
  2. For the Schedule C income next year, what type of limits are imposed on the solo-401k with regards to % of total profit and also, can I do Profit Sharing to go above that, or does that not apply in the case of a sole-proprietor (Disregarded LLC)?
  3. Does me making more than the social security limit have any affect on the contributions? I have seen some calculations with half the SS tax built in, but didn't quite understand it all in the context of all these combined questions of my situation.

Thanks for the help!

1

Alright, team!

I found answers to part 1) and part 2) that I've quote below, but still need help with 3). The facts in the article below seem to point to the ability for the LLC to contribute profit sharing of up to 25% of the wages it paid SE tax on. What part of the SE tax is that? I assume the spirit of the law is to only allow the 25% on the taxable portion of the income, but given that I would have crossed the SS portion of SE tax, I am not 100%.

(From http://www.sensefinancial.com/services/solo401k/solo-401k-contribution/)

Sole Proprietorship

Employee Deferral

The owner of a sole proprietorship who is under the age of 50 may make employee deferral contributions of as much as $17,500 to a Solo 401(k) plan for 2013 (Those 50 and older can tack on a $5,500 annual catch-up contribution, bringing their annual deferral contribution to as much as $23,000). Solo 401k contribution deadline rules dictate that plan participant must formally elect to make an employee deferral contribution by Dec. 31. However, the actual contribution can be made up until the tax-filing deadline. Pretax and/or after-tax (Roth) funds can be used to make employee deferral contributions.

Profit Sharing Contribution

A sole proprietorship may make annual profit-sharing contributions to a Solo 401(k) plan on behalf of the business owner and spouse. Internal Revenue Code Section 401(a)(3) states that employer contributions are limited to 25 percent of the business entity’s income subject to self-employment tax. Schedule C sole-proprietors must base their maximum contribution on earned income, an additional calculation that lowers their maximum contribution to 20 percent of earned income. IRS Publication 560 contains a step-by-step worksheet for this calculation. In general, compensation can be defined as your net earnings from self-employment activity. This definition takes into account the following eligible tax deductions: (1) the deduction for half of self-employment tax and (2) the deduction for contributions on your behalf to the Solo 401(k) plan. A business entity’s Solo 401(k) contributions for profit sharing component must be made by its tax-filing deadline.

Single Member LLC

Employee Deferral

The owner of a single member LLC who is under the age of 50 may make employee deferral contributions of as much as $17,500 to a Solo 401(k) plan for 2013 (Those 50 and older can tack on a $5,500 annual catch-up contribution, bringing their annual deferral contribution to as much as $23,000). Solo 401k contribution deadline rules dictate that plan participant must formally elect to make an employee deferral contribution by Dec. 31. However, the actual contribution can be made up until the tax-filing deadline. Pretax and/or after-tax (Roth) funds can be used to make employee deferral contributions.

Profit Sharing Contribution

A single member LLC business may make annual profit-sharing contributions to a Solo 401(k) plan on behalf of the business owner and spouse. Internal Revenue Code Section 401(a)(3) states that employer contributions are limited to 25 percent of the business entity’s income subject to self-employment tax. Schedule C sole-proprietors must base their maximum contribution on earned income, an additional calculation that lowers their maximum contribution to 20 percent of earned income. IRS Publication 560 contains a step-by-step worksheet for this calculation. In general, compensation can be defined as your net earnings from self-employment activity. This definition takes into account the following eligible tax deductions: (i) the deduction for half of self-employment tax and (ii) the deduction for contributions on your behalf to the Solo 401(k). A single member LLC’s Solo 401(k) contributions for profit sharing component must be made by its tax-filing deadline.

  • 2
    Welcome, glad you found your own answer. Would you mind quoting and citing the information. Just to prevent link rot. – MrChrister Dec 15 '14 at 20:39

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