Self Employed 401K Experts Self Employed 401K Experts

Self Employed 401K Contribution Limits

Unlike an IRA, a Self Employed 401k plan allows a plan participant to make high annual contributions to the Plan. The contributions can be in the form of pre-tax or Roth type contributions (after-tax).

The annual Self Employed 401k contribution consists of 2 parts, an employee salary deferral contribution and an employer profit sharing contribution. In 2014 the total contribution limit for a Self Employed 401k is $51,000 or $56,500 if age 50 or older. The total allowable contribution limits are combined to get the maximum Self Employed 401k contribution limit.

Employee Elective Deferrals

Up to $17,500 per year can be contributed by the participant through employee elective deferrals. An additional $5,500 can be contributed for persons over age 50. These contributions can be up to 100% of the participant’s self-employment compensation.

Employer Profit Sharing Contributions

Through the role of employer, an additional contribution can be made to the plan in an amount up to 25% of the participant’s self- employment compensation.

Total Limit

The sum of both contributions can be a maximum of $51,000 per year (for 2014) or $56,500 for persons over age 50.

If the business owner’s spouse elects to participate in the Self Employed 401(k) and earns compensation from the business, the spouse is allowed to make separate and equal contributions increasing the couples’ annual total contribution to $102,000 for 2014 or $113,000 if both spouses over age 50.

Self Employed 401k contributions are flexible. Both the salary deferral and the profit sharing contributions are optional and can be changed at anytime based on business profitability.

A Self Employed 401k participant can contribute to the plan as an employee and as employer.

Self Employed 401k Contribution Calculations

The calculation of how much can be contributed to a Self Employed 401k Plan is based on whether your business is taxed as a corporation and you receive a W-2 or if you are taxed as an LLC, partnership, or sole proprietorship.

C Corporation or S Corporation

Salary Deferral Contribution: In 2014, 100% of W-2 earnings up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed to a Self Employed 401k. The employee contribution election must be made prior to December 31.

Profit Sharing Contribution: Internal Revenue Code Section 401(a)(3) states that the amount of employer contributions is limited to 25 percent of the compensation paid. Accordingly, a profit sharing contribution up to 25% of W-2 earnings can be contributed into a Self Employed 401k. In other words, in the case of company, the employer profit sharing contribution must be based on the compensation paid by company not the overall profits earned by the company.

Multiple Member LLC or Partnership

Salary Deferral Contribution: In 2014, 100% of the owner’s self employment earnings up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed to a Self Employed 401k. The election for making salary deferral contributions is December 31.

Profit Sharing Contribution: Internal Revenue Code Section 401(a)(3) states that the amount of employer contributions is limited to 25 percent of the entity’s overall self-employment earnings. In other words, the 25% employer contribution amount is based on the K-1 income attributable to self-employment earnings, not necessarily the overall income of the entity if income is attributable to passive types of investments not considered self-employment earnings (i.e. passive business income).

Single Member LLC or Sole Proprietorship

Salary Deferral Contribution: In 2014, 100% of the owner’s self employment earnings up to the maximum of $17,500 or $23,000 if age 50 or older can be contributed to a Self Employed 401k. The election for making salary deferral contributions is December 31.

Profit Sharing Contribution: Internal Revenue Code Section 401(a)(3) states that the amount of employer contributions is limited to 25 percent of the entity’s income subject to self employment tax. Single member LLCs or Schedule C sole-proprietors must do an added calculation starting with earned income to determine their maximum contribution, which, in effect, brings the maximum 25% of compensation limit down to 20% of earned income. A step-by-step worksheet for this calculation can be found in Pub 560. In general, compensation is your net earnings from self-employment. This definition takes into account both of the following items: (i) the deduction for one-half of your self-employment tax, and (ii) the deduction for contributions on your behalf to the plan. The profit sharing contribution must be made prior to the date the business files its annual Federal Income Tax Return.

For additional information on the advantages of using a Self Employed 401(k) Plan with “checkbook control” to make investments, please contact one of our 401K Experts at 800-472-0646.

Contact Us or Get a Quote Today!