A Limited Liability Company (LLC) is a very popular business structure. It’s easy to setup and simple to maintain. The owner of the LLC is known as the member. An LLC can be a single-member or multi-member company. Further, the LLC may be taxed as a partnership or taxed as a corporation.
LLCs are formed at the state level with the secretary of state. LLCs are a popular business structure because they create a “fictitious entity. All business is done under the LLC name, using the LLC tax ID number. This can provide a layer of liability protection for the LLC owner. In the case of a lawsuit, the member’s assets are generally protected. Only the LLC assets are involved in the suit.
The LLC contribution limits may change according to a couple factors:
- Is the LLC single or multi member?
- Is the LLC taxed as a partnership or a corporation
The contribution limits for a Solo 401k plan are very high. You can contribute up to $56,000 per year, and $62,000 per year if you are age 50 or older. IRS Publication 560 has more information on overall plan contribution limits.
A single-member LLC is a disregarded entity. Generally, a single member LLC doesn’t have its own tax return. Instead, the revenue flows onto Schedule C of the member’s tax return.
A multi-member LLC taxed as a partnership files tax form 1065 and issues a K-1 to each member. The member then files his Schedule K1 with his annual tax return. If the LLC is taxed as a corporation, the entity files tax form 1120S and pays its members via W2.
In this article, we’ll discuss contribution limits and calculations for an LLC taxed as a partnership. To learn more about LLCs with corporation election, click here.
First, determine or estimate your net profits for the business. These will either be reflected Schedule C or Schedule K1 of your tax return, depending if your LLC is a single or multi-member.
Then, determine your employee (salary deferral) and employer (profit sharing) contribution amounts. Use our helpful contribution calculator to determine your Solo 401k contribution for your sole proprietorship.
The maximum employee salary deferral contribution can be up to 100% of your net compensation, maxing out at $19,000 (or $25,000 if you are age 50 or older). Your employee salary deferral contribution can be pre-tax (tax-deductible) or Roth.
If your LLC is a single-member entity, your maximum profit sharing contribution may be up to 20% of your net compensation (as shown on line 14 of Schedule K-1). If your LLC is a multi-member entity, your maximum profit sharing contribution may be up to 25% of your net compensation (as shown on line 14 of Schedule K-1).
The total contribution to your Solo 401k plan is the aggregate of your salary deferral and profit-sharing contribution.
You must make the Solo 401k contributions for your sole proprietorship by the time you file your business tax return. A single-member LLC is a disregarded entity. Therefore, your tax deadline is the same as your personal tax return (April 15th or October 15th with an extension). A multi-member LLC must file the tax return by March 15th, or September 15th with an extension.
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 sole proprietorship 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, 2019 in order to deposit contributions through tax day 2020.
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 sole proprietorship contribution on your 1040 tax return. Generally, you will note your contributions on line 28 of IRS form 1040. You only need to report the pre-tax (traditional) solo 401k contributions. Roth contributions and voluntary after-tax contributions are not reported on Form 1040. That’s because these two types of contributions don’t reduce your taxable income and they are not tax deductible.