A sole proprietorship is the most common business structure. That’s probably because it’s the easiest structure to use! A sole proprietorship means a “single owner”. As a sole proprietor, you might do business under your own name, or you could have a DBA (doing business as) fictitious business name. You might have an employer identification number (EIN) for your business, or you might use your social security number.
Once your business is generating revenue, you can start contributing to a retirement plan. The easiest way to do this is to setup a Self-directed Solo 401k plan.
Contribution Limits
The contribution limits for a Solo 401k plan are very high. You can contribute up to $69,000 per year, and $76,500 per year if you are age 50 or older. IRS Publication 560 has more information on overall plan contribution limits.
Contribution Calculations
First, determine or estimate your net profits for the business. These will generally be reflected Schedule C of your tax return.
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 $23,500 (or $31,000 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 20% of your net compensation (as shown on your Schedule C).
The total contribution to your Solo 401k plan will be the aggregate of your salary deferral and profit-sharing contribution.
Contribution Deadlines
You must make the Solo 401k contributions for your sole proprietorship 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 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, 2024 in order to deposit contributions through tax day 2025.
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.
UPDATE:
Due to changes in the Tax Cuts and Jobs Act of 2017, individual contributions are now listed on IRS Form 1040, Schedule 1, Line 15.
