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2017-02-06

Calculations for a sole proprietorship, partnership or an LLC taxed as a sole proprietorship

The annual Individual 401k contribution consists of a salary deferral contribution and a profit sharing contribution. The total allowable contribution adds these 2 parts together to get to the maximum Individual 401k contribution limit. The 2017 Individual 401k contribution limits are $54,000 and $60,000 if age 50 or older (2016 limits are $53,000 and $59,000 if age 50 or older).

Salary Deferral Contribution

Although the term salary deferral is used, a sole proprietorship, partnership or an LLC taxed as a sole proprietorship do not provide a W-2 salary to the business owner. For businesses of this type, the salary deferral contribution is based on net adjusted business profit. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self employment tax. In 2016 and 2017, 100% of net adjusted business profits income up to the maximum of $18,000 or $24,000 if age 50 or older can be contributed in salary deferrals to the Individual 401k.

Profit Sharing Contribution

A profit sharing contribution can be made up to 20% of net adjusted business profits. Net adjusted business profit is calculated by taking gross self employment income and then subtracting business expenses and then 1/2 of the self employment tax. Salary deferral and profit sharing contributions are generally 100% tax deductible from personal income.

  • EXAMPLE 1
    A sole proprietor is age 35 and works as an independent contractor with $50,000 of net income in 2017. In this example, the sole proprietor could contribute $18,000 of salary deferrals + $9,294 profit sharing contribution = $27,294 Total Individual 401k contribution.
  • EXAMPLE 2
    A sole proprietor is age 35 and works as an independent contractor with $100,000 of net income in 2017. In this example, the sole proprietor could contribute $18,000 of salary deferrals + $18,587 profit sharing contribution = $36,587 Total Individual 401k contribution.
  • EXAMPLE 3
    A sole proprietor is age 50 and works as an independent contractor with $50,000 of net income in 2017. In this example, the sole proprietor could contribute $24,000 of salary deferrals + $9,294 profit sharing contribution = $33,294 Total Individual 401k contribution..
  • EXAMPLE 4
    A sole proprietor is age 50 and works as an independent contractor with $100,000 of net income in 2017. In this example, the sole proprietor could contribute $24,000 of salary deferrals + $18,587 profit sharing contribution = $42,587 Total Individual 401k contribution.

Is there a deadline to make salary deferrals into the Individual 401k?

For a sole proprietorship, partnership or an LLC taxed as a sole proprietorship the deadline for depositing salary deferrals into the Individual 401k is generally the personal tax filing deadline April 15 (or October 15 if an extension was filed).

When must profit sharing contributions be made into the Individual 401k?

For a sole proprietorship, partnership or an LLC taxed as a sole proprietorship the deadline to fund the profit sharing contribution is the personal tax filing date of April 15 (or October 15 if an extension was filed).

Individual 401k Calculator

To determine the annual retirement contribution you could make based on your income use the Individual 401k Calculator.

Learn more about the benefits of the Individual 401k

 

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Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.