QUESTION: My client gave me your name as the person to contact if I had any questions about their new solo 401k. I'm preparing their tax returns, and here's my question - they didn't do any employee deferrals during the tax year, but it looks to me like the employer can make a contribution regardless of whether the employees defer, is that correct? If it makes a difference, the two S Corp owners (50% each) are the only employees, so that simplifies things. If this is true, what's the maximum that the employer could contribute in a year for each employee? Is it just the defined contribution plan maximum (again assuming there are no employee deferrals)?
Thanks for your help!
KT, CPA in Texas
ANSWER: Pursuant to IRS Publication 560, the self-employed individual has until his or her business tax return due date to make the salary deferral and employer contribution to his or her solo 401k plan. So in your case, if both solo 401k participants are looking to still make the salary deferral solo 401k contribution portions they may do so.
Contributions (both the employee and employer) to a self-employed 401k are based on the each individual's W-2 income. If you have the W-2 figure, you can plug it into solo 401k contribution calculator located on our website and it will do the rest of the work for you.
Regardless as to whether or not the self-employed individual chooses to make a salary deferral contribution or not, the employer contribution is calculated as follows:
25% x W-2 income = profit sharing contrition not to exceed $50,000 for tax 2012 and $51,000 for 2013
See following link for breakdown on how to manually calculate the solo 401k contribution for a S-Corporation or C-Corporation:
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