401K Plan Contribution Calculation for the Self-Employed with Employees

So how much can the self employed person contribute to a 401K plan with employees for elective, non elective (safe harbor), and profit sharing?

1. As an “employee” the self employed can contribute up to 18,000 for 2017 + an additional 6,000 if 50 or older. Of course there has to be “earned income” from the self employment.

2. What if the self employed person has employees? The plan is going to required a certain level of participation for the 401K plan to be a qualified plan. Often the employees are not interested in setting aside part of their paycheck for retirement. They need all of their pay check for rent and groceries.

So the company in order for the plan to qualify has to set aside some % of the employees salary. So for example 4% of compensation is used.

And in this example the regular employees’ wages is 100,000. So 4,000 would be contributed to the employees’ 401K plan on their behalf.

Well what about the self employed person. Let’s say the net profit from schedule C is $90,000 in 2017. And the self employed person is 54 years old.

Can we set aside 4% for the self employed person? Yes but there is a calculation. The 4% is applied after the 4% is taken into consideration. Yes, it is confusing.  Let’s take a look at the 401K plan contribution calculation.

 

The 401K plan contribution calculation: an example

Net Profit Schedule C                                    90,000

Less deductible portion on SE tax           (6,358)
Line 27 of the 1040                                        ——

83,642
=======

4%/104% = .038462 X 83,642 = 3,217

3. So the third question is what if the business had a great year and the self employed person would like to make an elective contribution (a profit sharing)?

Yes that can be done. So for example the owner decides to make a 8% contribution to the regular employees’s 401K plan  in addition to the 4% safe harbor (non elective) contribution.

Can the owner also participate in the profit sharing and make a contribution to his 401K plan? Yes!

8%/108% = 7.41% is the equation for the percentage. The owners profit sharing amount would be 83,642 X .0741 = 6,198.

So in total the owner can contribute 18,000 + 6,000 + 3,217 + 6,198 = 33,415.

Please keep in mind there is a top limits that can be contributed. 54,000 + 6,000 for the over the age of 50 catch up.

Make sure to see your tax advisor regarding your particular situation.