IRA - 401k - Retirement
If there is no more than one employee and that person is the sole owner, i.e.
- the sole shareholder of the corporation or
- the sole member of the LLC (SMLLC)
or if there are no more than two employees and if they are the sole owners, i.e.
- the only two shareholders of the corporation or
- the only two members of the LLC
and they are married to each other, then this situation should qualify for a self-employed 401(k) Profit Sharing Plan. a/k/a one-participant 401(k) Profit Sharing Plan. The 401(k) portion may be deductible and/or it may be a Roth.
A one-participant 401(k) plan is generally required to file an annual report on Form 5500-SF if it has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement.
The employee may contribute (withhold from the salary) up to $19,500 under age 50 and up to $26,000 over age 49 for 2020. The DOL says the 401(k) needs to be deposited as soon as possible after the paycheck it was deducted from (2-weeks might be considered a reasonable delay). The IRS says the 401(k) needs to be deposited no later than the extended due date of the applicable tax return.
The above maximums are per individual, not per 401(k) account.
The employee contribution amount is based on (and limited to) the amount reported in Box 1 of your W-2 from the S-corporation plus any pre-tax employee contributions not in Box 1.
An employer contribution is up to 25% of an amount equal to Box 1 of your W-2 from the S-corporation plus any pre-tax elective deferrals not in Box 1, provided that the total sum of all the above contributions do not exceed the overall limit: $57,000 or if coupled with a SE401(k) then up to $63,500 over age 49.
- Determine the maximum 401(k) salary deferral as W-2 box 1 + the pre-tax 401(k) contribution which often is the amount shown in W-2, box 5, subject to the maximum amounts of $19,500 or $26,000.
- Keep in mind, for example, if your salary is $15,000 and the above maximum therefore is $15,000, that there will not be enough net pay to withhold $15,000 due to Social Security and Medicare withholding. So the $15,000 less $1,147.50 only leaves you with $13,852.50 remaining to withhold for the 401(k).
- Certain 401(k) plans (and most one-participant plans) allow for discretionary employer contributions or non-elective employer contributions that could mitigate this Social Security and Medicare issue.
- Next determine the maximum profit sharing contribution, similar to the above, up to 25% times W-2 compensation, subject to the combined maximum amounts of $57,000 or $63,500.
- Next determine if you qualify for an IRA of up to $6,000 under age 50 and up to $7,000 over age 49. Subject to limits based on your AGI. If you do not qualify due to an AGI that is too high, then a backdoor Roth via a non-deductible IRA may be an interesting possibility.
Fidelity Investments has a decent self-employed plan contribution calculator to double check your own computations. And they have another interesting contribution calculator, here.
The contribution to the 401(k) and to the Profit Sharing Plan is tax deductible. Or you might choose to put the 401(k) portion into a non-deductible Roth 401(k).
But the salary is subject to payroll taxes:
- 6.2% FICA WH from the employee's wages
- 6.2% employer match, paid by the S-Corp
- 1.45% Medicare WH from the employee's wages
- 1.45% employer match, paid by the S-Corp
- 0.08% FUTA on first $7,000 of wages, paid by the S-Corp
- 3.x% SUTA on first $15,000 of wages (varies by state), paid by the S-Corp