Solo 401K plan contributions for Self-employed

swongtax · ‎05-29-2021

Hello all,

I am researching Solo 401K plans for Self-employed individuals, and I am having trouble understading the logistics of the IRS rules, it sounds very confusing.

See IRS publication 560, Chaptes 2, 4, 6.

Below are the steps for calculating "maximum Deductible Contribution" for the self-employed taxpayer. I am confused as to why it is necessary to go through this entire calculation. It sounds like even if the taxpayer is able to contribute the maximum $19500 per year (under age 50) based on the net profit limitations, it does not mean that this entire amount could be deductible (as pre-tax contribution) on Schedule 1, Line 15. Is this the purpose of the step by step instructions below?

SW

6. Table and Worksheets for the Self-Employed

As discussed in chapters 2 and 4, if you are self-employed, you must use the rate table or rate worksheet and deduction worksheet to figure your deduction for contributions you made for yourself to a SEP-IRA or qualified plan.

First, use either the rate table or rate worksheet to find your reduced contribution rate. Then, complete the deduction worksheet to figure your deduction for contributions.

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The table and the worksheets in chapter 6 apply only to self-employed individuals who have only one defined contribution plan, such as a profit-sharing plan. A SEP plan is treated as a profit-sharing plan. However, don't use this worksheet for SARSEPs..

Rate Table for Self-Employed.

If your plan's contribution rate is a whole percentage (for example, 12% rather than 12½%), you can use the Rate Table for Self-Employed on the next page to find your reduced contribution rate. Otherwise, use the Rate Worksheet for Self-Employed provided below.

First, find your plan contribution rate (the contribution rate stated in your plan) in Column A of the table. Then, read across to the rate under Column B. Enter the rate from Column B in step 4 of the Deduction Worksheet for Self-Employed on this page.

Example.

You are a sole proprietor with no employees. If your plan's contribution rate is 10% of a participant's compensation, your rate is 0.090909. Enter this rate in step 4 of the Deduction Worksheet for Self-Employed on this page.

Deduction Worksheet for Self-Employed

Step 1
	Enter your net profit from Schedule C (Form 1040), line 31; Schedule F (Form 1040), line 34;* or Schedule K-1 (Form 1065),* box 14, code A.** For information on other income included in net profit from self-employment, see the Instructions for Schedule SE (Form 1040)	_____
	* Reduce this amount by any amount reported on Schedule SE (Form 1040), line 1b.
	** General partners should reduce this amount by the same additional expenses subtracted from box 14, code A, to determine the amount on line 1 or line 2 of Schedule SE (Form 1040).
Step 2
	Enter your deduction for self-employment tax from Schedule 1 (Form 1040), line 14	_____

Step 3
	Net earnings from self-employment. Subtract step 2 from step 1	_____
Step 4
	Enter your rate from the Rate Table for Self-Employed or Rate Worksheet for Self-Employed	_____
Step 5
	Multiply step 3 by step 4	_____
Step 6
	Multiply $285,000 by your plan contribution rate (not the reduced rate)	_____
Step 7
	Enter the smaller of step 5 or step 6	_____
Step 8
	Contribution dollar limit	$57,000
	•	If you made any elective deferrals to your self-employed plan, go to step 9.
	•	Otherwise, skip steps 9 through 20 and enter the smaller of step 7 or step 8 on step 21.
Step 9
	Enter your allowable elective deferrals (including designated Roth contributions) made to your self-employed plan for the 2020 plan year. Don't enter more than $19,500	_____
Step 10
	Subtract step 9 from step 8	_____
Step 11
	Subtract step 9 from step 3	_____
Step 12
	Enter one-half of step 11	_____
Step 13
	Enter the smallest of step 7, step 10, or step 12	_____
Step 14
	Subtract step 13 from step 3	_____
Step 15
	Enter the smaller of step 9 or step 14	_____
	•	If you made catch-up contributions, go to step 16.
	•	Otherwise, skip steps 16 through 18 and go to step 19.
Step 16
	Subtract step 15 from step 14	_____
Step 17
	Enter your catch-up contributions (including designated Roth contributions), if any. Don't enter more than $6,500	_____
Step 18
	Enter the smaller of step 16 or step 17	_____
Step 19
	Add steps 13, 15, and 18	_____
Step 20
	Enter the amount of designated Roth contributions included on steps 9 and 17	_____
Step 21
	Subtract step 20 from step 19. This is your maximum deductible contribution	_____

Next: Enter your actual contribution, not to exceed your maximum deductible contribution, on Schedule 1 (Form 1040), line 15.