Deadlines for making contributions to a Solo-K can, at times, appear to be in conflict with an employee who participates in a 401(k) plan as a W-2 participant. For example, for those of us who have been (or still are) W-2 employees, imagine if we went up to our employer on January 4 of the following year and said, “hey, I still want to make contributions to my plan for last year!” Well, as we would imagine, we wouldn’t get too far for all the obvious reasons.
Let’s break this down whether you are s sole proprietorship, single member LLC (flows back to you individually), multi-member LLC (2 or more members of the LLC), an S-Corp or C-Corp. In this post, we will review sole props and S and C-Corps and, in the next post address single and multi-member LLC in the next post.
Well, the rules can be slightly different, depending on how your business is established. For example:
Elective Deferrals — Deadlines for making contributions to your Solo-K permits the participant to make their elective deferral contribution all the way up to when they file their personal tax returns (4/15 or 10/15). The kicker, however, is that the participant must make a formal election to make their elective deferral by 12/31 (assuming 12/31 is the business’s end of year).
PGI clients can use their elective deferral form to make this election. The contributions to your elective deferral account(s) can be made in either a pre-tax or Roth manner. Roth elective deferrals must be permitted by your plan. All PGI clients have the Roth contribution option available to them.
Profit Sharing Contributions — Your income is based on net earnings which is the amount after you take the deduction for one-half of the self-employment tax, and the deduction for contributions made to your Solo-K plan. These profit sharing contributions can be made up to their tax-filing deadline of either April 15 or October 15 (with extension)).
The IRS has the following release to help you determine the amount of contributions you can make to your self-administered 401(k) plan.
Elective Deferrals — Elective deferrals for an s- or c-corp are to be made through payroll. Obviously, the elective deferral contribution(s) will depend on the business’s payroll frequency and structure. Simply speaking, if the business uses a payroll service, the employee will “elect” their deduction and have (generally speaking) equal, consistent contributions to the plan that are being made through established payroll. A business who does not use payroll will typically permit the employee to make contributions at any time during the year.
Of course, provided different accounts are maintained, the elective deferrals can be made in either a pre-tax or Roth manner.
Profit-Sharing Contributions — The business can make a pre-tax profit-sharing contribution on behalf of the participant up to the business’s tax filing deadline (i.e., 3/15 or 9/15).
For a corporate profit-sharing contribution, the employer may be able to put in up to 25% of the participant’s compensation (keeping with the annual contribution limits, of course). While this contribution is made as a corporate, pre-tax contribution, the employee can convert the profit-sharing contribution to Roth funds, but only if the 401(k) plan documents permit the conversion of such funds and the amount converted to Roth is included in the employee’s taxable income. PGI plans can permit this Roth conversion amendment option.
Next: we will review the deadlines for making contributions to a Solo-K for both single-member and multi-member LLCs.
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial of investment advice. One should always review their situation with their respective professional.