If your business is incorporated, the employer contribution is based on your W-2 income and is contributed by the business. The maximum employer contribution is 25% of pay. It is not subject to federal income tax or Social Security (FICA) taxes. The salary deferral contributions are withheld from your pay pre-tax contributions and are excluded from federal income tax but are subject to FICA. The maximum salary deferral amount for 2008 is 100% of pay up to $15,500 or $20,500 if you are age 50 or older. Your business receives a tax deduction for employer contributions and salary deferral contributions not designated as Roth. Note: Your annual contributions to a solo 401(k) cannot exceed $46,000 or 100% of pay ($51,000 if you are age 50 or older).¹

If your business is unincorporated, the employer and salary deferral contributions are based on your net earned income. For help in determining your maximum contribution amount, please consult your tax advisor or accountant.  Contributions are not subject to federal income tax but are subject to self-employment taxes (SECA). You receive a tax deduction for both salary deferral and employer contributions on your Form 1040.

Can I contribute to a Solo 401(k) for my sideline business if I participate in another employer-sponsored plan?
Yes. You can contribute to a Solo 401(k). However, if you make salary deferral contributions to another employer's plan, you must count those amounts along with any deferrals made to your Individual K when determining the maximum deferrals that may be contributed for the year. This aggregation is not necessary for employer contributions.

Can the employer contribution vary by participant?
No. Each owner and spouse must receive the same percentage-of-pay contribution. So if you give yourself a 25%-of-pay employer contribution, all participants must receive a 25%-of-pay contribution. This rule does not apply to salary deferral contributions. Each participant may choose how much to defer. You may elect to have your salary deferral contributions be made on either a pre-tax or Roth basis.

When must contributions be made in order to take a deduction for a given year?
Employer contributions must be made by the business tax filing deadline plus extensions. Generally, salary deferrals should be deposited by the 15th business day following the month in which they are withheld from pay or business income.

Administrative Issues

What are my administrative responsibilities?
Since your plan covers only owners and spouses, your administrative requirements are minimal. In addition to remitting contributions to the plan, the IRS requires an annual filing of the Form 5500. Generally, no filing is required until total assets exceed $250,000. Some providers offer an optional low cost service to provide you with a signature-ready form. If you prefer to prepare the 5500 yourself, some companies will automatically send you an annual package of filing instructions.

 

You may borrow up to the lesser of $50,000 or 50% of your account balance, subject to certain IRS restrictions.  Generally, the minimum loan amount is $1,500.  Please see the terms and conditions of your particular provider's terms and conditions.

 

You must repay the loan in equal monthly installments.  In most cases, your loan repayment period may not exceed five years. If the loan is used to purchase a principal residence, the loan period may be extended for up to 15 years.  Your first monthly payment is due 30 days following the issuance of your loan check.  You may repay your entire loan balance without penalty at any time.