I have an individual 401k - I’m self-employed. “My company” can contribute up to 25% of my “employee” W-2 wages to my 401k as the employer contribution.
This morning I realized I made an error. Here are some numbers.
Company made $30K.
I paid myself, by W-2, $25K.
I contributed, for the employer portion, 25% of 25K = $6,250
That leaves my company with ($1,250) for the year (25000 + 6250 = 31250.)
Is this a problem? I know companies can obviously lose money on the year; I’ve just never done it before and don’t know if it’ll lead to any problems come tax return time.
I’ve seen the 25% employer contribution referred to as “profit sharing” which then doesn’t make sense if my business isn’t making a profit.
Any thoughts (other than to get an accountant; my taxes are very simple (typically) and hiring an accountant isn’t financially sensible unless absolutely necessary.
My wife has one of these too, and they’re pretty complex. The IRS publication 560 walks you through that calculation, but I think what’s going on is that in effect the contribution is limited to 20% for the very reason you found: 20% of your $25k is $5k which totals up to the $30k net income.
Be sure to file the annual paperwork if you need to.
Thanks - I actually ended up just getting the contribution I accidentally made canceled before it had even processed, so I’m not actually in the situation I posted about originally, but left it up since I was still curious about the answer.
AFAIK, the only limitations on an employer’s Solo 401(k) contribution are 25% of salary and $53,000 total salary deferral/employer contribution. I think the only problem you’ll have is counting the excess contribution as a loss.
If you paid yourself by W-2, then you’re not a sole proprietor, I take it? If you are a sole proprietor, then paying yourself on a W-2 is wrong. Your 401k isn’t based on W-2 wages, but on a percentage of net income from the business. The same is true for a partner in a partnership. No W-2.
If you’re the sole employee of a corporation, then there’s no problem. You do pay yourself on a W-2 and use those wages to calculate retirement contributions. The company can have negative income. It might not be to your best financial advantage regarding all the various taxes involved, but it’s not wrong.