CORPORATION: Calculating My Solo 401k contributions for a Corporation

For incorporated business owners, Solo 401k contributions will generally be based on the  business owner's compensation, which is often defined as Social Security wages (as reported on IRS Form W-2). However, incorporated business owners should be sure to understand the definition of compensation within their plan documents, as the definition of compensation can vary slightly from one plan document to the next. Remember that the maximum Solo 401k contribution is comprised of two components: an employer profit sharing contribution and an employee salary deferral contribution.   

NOTE: Owners of Subchapter S corporations must base their contributions on Form W-2 income and may not base Solo 401k contributions on pass-through profits.

Once the incorporated business owner's compensation is determined (or estimated in the case of advance planning), the maximum Solo 401k contribution may be determined as follows, based on 2010 an 2011 limitations.

Step 1: Determine maximum profit sharing contribution
            maximum profit sharing contribution = .25 x compensation

Step 2: Determine maximum salary deferral
         maximum salary deferral = lesser of $17,000, or
                                                  compensation-maximum profit sharing contribution

Step 3: Calculate maximum Solo 401(k) contribution
            maximum Solo 401(k) contribution = maximum profit sharing contribution
                                                                      + maximum salary deferral

NOTE: The maximum Solo 401(k) contribution for 2012 may not exceed $50,000 (unless your age 50 or older and therefore qualify for an additional $5,500 of catch-up contributions)