A corporation is a fictitious business entity. The purpose of a corporation is to keep asset and liabilities separate from its owner. Owners of corporations are called shareholders. Corporations are formed at the state level with the secretary of state. All business is done under the Corporation name, using the designated corporation tax ID number. This can limit liability protection of the shareholder. In the case of a lawsuit, the shareholder’s assets are generally protected. Only the corporation assets are involved in the suit.
There are generally two types of corporations
- Subchapter S Corporation: also known as an S-corp. The S-corp is a type of pass through entity for taxation. The S-corp does not pay corporate taxes. Instead, earnings are passed through to the shareholders who then pay taxes on the earnings on their personal tax returns.
- C-Corporation: must pay corporate income taxes. Owners/shareholders pay taxes on their profits/dividends, and earnings. Both the owner (personal) and corporation (business) pay taxes on the earnings. This creates double taxation.
The contribution limits for a Solo 401k plan are very high. You can contribute up to $57,000 per year, and $63,000 per year if you are age 50 or older. IRS Publication 560 has more information on overall plan contribution limits.
First, determine or estimate your net earnings. Keep in mind earnings are different than dividends.Contributions are based on earnings, not dividends. Similarly, S-corp shareholders must calculate contributions based on earnings, not pass through profits. You will generally show your earnings in Box 1 of the IRS W2 form.
Next, determine your employee (salary deferral) and employer (profit sharing) contribution amounts. Use our helpful contribution calculator to determine your Solo 401k contribution for your corporation.
The maximum employee salary deferral contribution can be up to 100% of your net compensation, maxing out at $19,500 (or $26,000 if you are age 50 or older). Your employee salary deferral contribution can be pre-tax (tax-deductible) or Roth.
Your maximum profit sharing contribution may be up to 25% of your net compensation (as shown in Box 1 of your W2 form).
The total contribution to your Solo 401k plan will be the aggregate of your salary deferral and profit-sharing contribution.
You must make the Solo 401k contributions for your corporation by the time you file your business tax return. If you filed an extension for your tax return, you have until your extension due date to deposit the contribution funds into your 401k bank or brokerage account.
Keep track of your corporation contributions by completing a Solo 401k contribution form.
Remember, you must establish your Solo 401k plan by December 31st to be able to capture contributions for that tax year. For example, your Solo 401k plan must be established by December 31, 2020 in order to deposit contributions through tax day 2021.
Make Your Contribution
Once you’re ready to deposit funds, write a check payable to your Solo 401k trust. Write “Solo 401k contribution” in the memo section of the check. Then, deposit the contribution check into your Solo 401k bank or brokerage account.
Document your Solo 401k corporation contribution on your tax return. Generally, the employee (salary deferral) contributions will appear in your W2 in box 12a. Your employer (profit-sharing) contributions will appear on Line 17 of IRS form 1120S. You only need to report the pre-tax (traditional) solo 401k contributions. You do not report Roth contributions and voluntary after-tax contributions on Form 1040. That’s because these two types of contributions don’t reduce your taxable income and they are not tax deductible.