OVERVIEW & FAQ
- Are solo 401k contributions tax deductible? A traditional solo 401k is funded with pre-tax income, and contributions are tax deductible. However, a Roth solo 401k is funded with after-tax income, and contributions are not tax deductible. While only some solo 401k providers offer a Roth option (like the Carry Solo 401k), all solo 401k providers come with a pre-tax account by default.
- How much can I deduct each year? If you contribute only to a traditional solo 401k for the year, you can deduct up to $66,000 ($73,500 if you’ll be at least 50 years of age by December 31, 2023) for 2023.
- How do I claim contribution deductions on my income tax? If your business is not incorporated, you can report employee and employer deductions together on Form 1040. If your business is incorporated, you will need to report employee contributions in your W2, and employer contributions in Form 1120. If your corporation is an S corporation, you would fill out Form 1120-S, instead.
- Are there any other required tax filings for a solo 401k? If your solo 401k plan assets exceed $250,000 in value, you are required by the IRS to submit Form 5500-EZ. If your plan assets do not exceed $250,000 in value, there are no other required tax filings each year.
A solo 401k has no annual tax filing requirements set by the IRS, unless your account assets exceed $250,000 in value. Account holders with over $250,000 in assets must file Form 5500-EZ each year. However, pre-tax contributions made to a solo 401k are tax deductible, so you still need to claim the deductions when you file your taxes each year.
This guide will explain exactly which solo 401k contributions are tax deductible, and the process for claiming your deductions depending on your business entity.
Before we begin, download the Solo 401k Handbook: Everything you need to know about the solo 401k in a handy PDF format.
Are solo 401k contributions tax deductible?
Yes, pre-tax contributions made to a traditional solo 401k plan are tax deductible. Roth solo 401k contributions are made in after-tax dollars and are not tax deductible.
- Contributions made to a traditional solo 401k plan are paid with pre-tax dollars and gets deducted from your taxable income. However, you’ll be taxed when you withdraw from your account in retirement.
- Contributions made to a Roth solo 401k plan are paid with after-tax dollars and does not get deducted from your taxable income. However, withdrawals in retirement are completely tax-free.
Looking for a solo 401k that offers a Roth account? Compare the best Roth solo 401k providers here.
How solo 401k contributions work
With a solo 401k, you make contributions as both the employer and the employee, and there are different contribution limits for each side.
The total contribution limit for a solo 401k in 2023 is $66,000. Here’s how that gets broken down:
- Employees: Employees can contribute up to 100% of their income up to a maximum of $22,500 ($30,000 if you’ll be 50 years of age or older by December 31, 2023).
- Employers: Employers can contribute up to 25% of their income (approximately 20% if you’re not incorporated).
How much of a tax deduction can I get with a solo 401k?
If you make all your contributions with pre-tax dollars into a traditional solo 401k, you can deduct up to the maximum contribution limit of up to $66,000 ($73,500 if age 50+) for 2023.
However, getting maximum tax deductions also means that you’re not contributing anything to the Roth account.
Employer contributions must be made with pre-tax dollars to a traditional solo 401k. Employees, however, get to choose whether they want to contribute to a traditional account or a Roth account. In other words, you get to choose how much you want to deduct from your taxable income for the year.
Which account you contribute to is entirely up to you and depends on how much you want to deduct from your income taxes for the year.
If you wanted to deduct the entire amount, you would make all your contributions in pre-tax dollars to a traditional solo 401k account. If you don’t mind paying taxes this year, and would rather not have to pay taxes when you withdraw from your account in retirement, you would maximize your Roth contributions.
If you want to maximize your Roth contributions, there’s also a method called the mega backdoor Roth and you can use it with your solo 401k to contribute the solo 401k limit into a Roth account. Learn more about it here.
How to claim solo 401k contributions on your tax returns
The process for claiming solo 401k contributions is different depending on whether your business is incorporated or not.
Passthrough (not incorporated) business entities include:
- Sole proprietorships
- LLC’s taxed as a sole proprietorship
Incorporated business entities include:
- S corporations
- C corporations
- LLC’s taxed as a corporation
The main difference between the two is that if you’re not incorporated, business income and contributions pass directly to your personal income tax return. This is why they’re referred to as passthrough businesses. For incorporated businesses, business income and contributions do not pass directly to your personal income tax return. They’re separate entities from you.
Process for passthrough businesses
If your business entity is a sole proprietorship, partnership, or LLC taxed as a sole proprietorship, follow the steps below.
- Submit both employer and employee contributions on your personal tax return, Form 1040.
- Report the total of employer contributions + employee contributions on line 16 of Schedule 1.
- Calculate your business income using Schedule C.
- Subtract employer contributions from business income. Report this number on line 8a of Schedule 1.
Process for incorporated businesses
If your business entity is an S corporation, C corporation, or LLC taxed as a corporation, follow the steps below.
Unlike for passthrough businesses, employer and employee contributions don’t get submitted in the same tax return. The business is a separate entity from you and you’re required to claim employer and employee contributions in separate forms.
For employer contributions
WHY IS THE FORM DIFFERENT FOR AN S CORPORATION?
Incorporated businesses are not allowed to pass through business income to its owners. Instead, the corporation will pay its own income taxes. However, an S corporation does pass through business income to its owners. Therefore, it’s reported differently than other incorporated business entities.
For employee contributions
- Report your employee contributions on box 12 of your W2.
Note: There are several different categories and options for box 12 in your W2. For a solo 401k, the correct code is “12D”. This is the box you would input your employee contributions.
The IRS requires solo 401k account holders to file Form 5500-EZ for each year their account value exceeds $250,000. It’s basically an overview of your solo 401k account listing your contributions, value of your assets, and any rollovers or loans you may have done. This is separate from claiming your contribution tax deductions, but it’s still important to note here. Penalties for late filings of Form 5500-EZ are incredibly steep, $250 per day capped at $150,000.
The deadline to file is 7 months after your fiscal year ends. If your business follows the calendar year, the due date would be July 31 each year. While it’s not a requirement if your plan assets do not exceed $250,000 it’s still a good idea to submit one each year anyways.