Discussion:Solo 401(K) - Profit sharing contribution

I am the sole shareholder of a S-corp. No other employees. I have a solo 401(k).

1) If I am contributing 25% of my compensation towards profit(say 0.25 * 100,000 = 25,000), then is this considered compensation since I am the only share holder. How is this treated in 1120-S.

2) Should this profit also be reported on 940 - line 3?

Any input will be appreciated. Thank you

Yes my W-2 is 100,000.

I have deferred 15,000 from my salary towards solo 401(k). In addition my company is contributing 25,000 towards 'Employers' profit sharing contribution'.

So my question was around the 25,000 profit sharing. I vaguely remember reading somewhere that any profit sharing contribution made for an officer should be treated as compensation. Hence the above questions. Thank you

http://www.individual401k.com/individual_401k/benefits.htm

In 2006, the total contribution limit for an Individual 401k plan is $44,000 ($49,000 if age 50 or older). The annual contribution into an Individual 401k is made up of 2 parts: a tax deductible salary deferral contribution and a tax deductible profit sharing contribution. The maximum allowable contribution calculation simply takes the profit sharing contribution and adds the maximum salary deferral contribution amount to it and that’s the total allowable contribution.

In 2006, 100% of compensation up to a maximum of $15,000 ($20,000 if age 50 or older) can be contributed in salary deferral. In addition a profit sharing contribution can be made up to 25% of compensation. For incorporated businesses the 25% profit sharing contribution is based on W-2 income. For sole proprietors the 25% profit sharing contribution is based on adjusted earned income. Adjusted earned income is determined by completing an IRS worksheet and is calculated by taking gross self employment income and subtracting business expenses and 1/2 of the self employment tax (FICA and Medicare).

I am an S-corp with 1 employee/employer.

Salery deferral: Say Max allowed is 15k.

Where do I take the deduction for this ? 1120S/K1 or 1040 and what other form? Assuming I do not pay Income Tax on SalDeferral, but I pay FICA. For a 100k income[w2], I pay IncomeTx+FICA on 85k and only FICA for 15 K. Am I correct ?

Profit Sharing: 25% of W2 wage.

Where do the 25% of w2 come from; is this what left after paying w2 + Corp-expense. or from the w2-100k ? If this comes from corp leftover after [w2 + exp ], then its a 1120S/K1 deduction ??

1. Salary deferral portion:

- Up to $15,500 of what you W2 yourself.

- Do not include this amount in box 2 (wages) of 941 (box 2 of 941 should equal box 1 of W2).

- The amount is included in SS / Medicare wages.

- Put this amount in Box 12 of W2 (with a D code).

- You pay FICA taxes on the Salary Deferral, no federal taxes until you withdraw it from the 401k (this is why it is not included in as wages).

- On the 1120s, the amount is included in the Compensation to Officers.

- The irs considers that the corporation paid the employee a salary, and the employee put some of the money in a 401k.  This lowers the corporations distribution (k1) amount because the money went out as payroll.
  

2. Profit Sharing portion:
- Up to 25% of SS wages (box 5a of 941 or box 3 of W2).
- Does not have to be listed on the W2. If you do want to, put in box 14 (I would not).
- On 1120s, (to the best of my knowledge) Put this amount in the Pension, profit sharing…etc, plans box.
- It does not go on the 1040. (remember this is for single owner s-corps, schedule C filers do something different)
- So the corporation takes the deduction, it is not included as w2 income nor is listed in the K1.

I think this is correct. I do my own payroll, 941, 940 and w2 once a year. This is my first year contributing to an individual 401k, so I’m not 100% certain yet.

If you are looking for more tax savings, open an HRA and/or an HSA.

Way 1: Add Salary Deferral to box 17 (Pension, profit-sharing, etc., plans) and do not include in Box 7 (Compensation).

Way 2: Add Salary Deferral to Box 7 and do not include in Box 17.

See:

http://www.taxalmanac.org/index.php/Discussion:Solo_401K_-_Reporting_Contributions_on_1120S http://www.taxalmanac.org/index.php/Discussion:Solo401K,_W-2_reporting_and_1120S

I like Way #1 because I am a single person S corp and I like Box 7 to match Box 1 of W2 and Box 2 of 941.

Again, I am not a CPA and only do some of my own taxes. I am posting this follow-up so I'll have this info handy for next year's payroll. (Also I just checked my 1120s for 2008 and my tax lady didn't do either Way 1 or Way 2, so my K1 is more than it should be. Time to amend the 1120s.)

Also I did not show how to handle the HRA (Health Reimbursement Arrangement). The HRA came in handy this year. My wife and I had a baby and maternity is not covered under our HSA insurance, so the HRA worked out nicely. Basically a HRA can pay for medical expenses that not covered by the HSA, and also insurance premiums.

Here’s how I am handling my individual 401k and HRA in my single person s corp.

Definitions- Base: payroll money that does not include EE, ER or HRA

HRA: money that was reimbursed

EE: 401k Employee Elective Deferrals

ER: 401k Employer Profit Share

Now the 941 form:

Box 2 Wages: Base + HRA (do not include ER or EE)

Box 3 Withholding: there are charts to calc this number, call irs for help

Box 5a. SS wages: Base + EE (do not include HRA or ER-no fica tax on ER)

Box 5b. FICA wages: same as 5a

On W2:

Box 1: Same as 941 box 2

Box 3/5: Same as 941 box 5a/5b

Box 12: D code with EE amount

1120s:

7 Compensation to officers: Base + HRA (same as 941 box 2)

17 Pension, profit share etc: EE + ER

- Limitations are based on Compensation to officers (not SS wage) - EE Salary Deferrals must be posted to 401k custodian 15 days after period end (Jan 15th) - ER Profit share must be posted to 401k custodian when 1120s is filed March 15 plus extensions

Other notes for S corps:

- Limitations are based on Compensation to officers wage (not SS wage)

- EE Salary Deferrals must be posted to 401k custodian 15 days after period end (Jan 15th)

- ER Profit share must be posted to 401k custodian when 1120s is filed March 15 plus extensions