How to Claim the Solo 401(k) Contribution Deduction for Self-Employed Business Owners
Dylan Telerski / 12 Nov 2020 / Business
One of the benefits of the Solo 401(k) is that it’s relatively easy to administer, with nothing more than a 5500-EZ form filing due once the total account balance reaches $250,000 or gets terminated.
However, to maximize the tax-exemptions for your small business retirement account, you will also need to claim your Solo 401(k) contributions on your tax return.
Please note: Ubiquity Retirement + Savings is not a tax advisor and does not provide tax advice. This material has been prepared for informational purposes only–please consult a CPA or your tax advisor with specific questions and guidance.
Clearing Up Solo 401(k) Confusion
When thinking of your Solo 401(k), it’s helpful to think of yourself as both “employee” and “employer.” Therefore, you will be making two different tax calculations – one for your business’ net earnings and one for your business’ tax-exempt contributions.
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How to Claim the Solo 401(k) Contribution for Pass-Through Businesses
If your business is a pass-through structure like a sole proprietorship, LLC, or partnership:
- Submit both contributions to the IRS on your personal tax return, form 1040.
- Calculate your earned income from the business using Schedule C.
- Report the total employer and employee contribution on line 15 of Schedule 1.
- Subtract the employer contribution from your taxable income to report adjusted income on line 8a of Schedule 1.
How to Claim the Solo 401(k) Contribution for S-Corps
If your business of one is classified as a corporation, business income and contributions are calculated as a separate entity, independent from your personal income tax return. However, S-corps receive special treatment, as business income may pass through to owners and shareholders.
You will need to file an additional tax return for your business in this case, but you enjoy freedom from any other “corporate tax” obligations.
- Fill out your S-corp information using Form 1120-S.
- List your Solo 401(k) employer contribution on line 23.
- You will also need to fill out Form 5500 or 5500-SF if your account balance is over $250,000.
- And, on a personal level, you will need to fill out the employee contribution on box 12 of your W2.
Keep in mind: your salary-reducing portion of the Solo 401(k) contribution has already been deducted from your taxable amount in box 1 of your W2.
What If You Have a Roth?
Roth contributions are after-tax, so they won’t be listed on your personal or business tax returns. While you aren’t claiming a deduction anywhere for the money put into your account, you will enjoy tax savings upon retirement as you’re taking the money out.
Have Questions About Claiming a Solo 401(k) Contribution Deduction?
As your 401(k) plan provider, we are always happy to assist our Solo 401(k) contributors at tax time. Use our convenient Solo 401(k) calculator, or contact our on-staff accountants to ensure you meet all necessary filing requirements and fully understand the unique advantages of a Solo 401(k). Contact Ubiquity to learn more.
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