Solo 401(k) Contribution Limits

401(k) plans have a maximum contribution limit that is set annually by the Department of Labor. The limits are generally updated and released in late October for the coming year.

Please keep in mind these limits are general in nature, and your individual ability to contribute may be impacted by factors such as business entity type, marital status, income, and whether you or your spouse participate in a separate employer sponsored retirement plan. Please seek guidance from your tax advisor regarding 401(k) contributions.

There are two types of contributions that may be made to a plan.

• The employer may make profit sharing contributions up to the plan maximum, based on a percentage of income. The percentage calculation varies for businesses taxed as a pass through to the owner as compared with businesses taxed as corporations.
• As an employee, you may also elect to defer income into the plan. You may defer up to 100% of your income (after self-employment taxes), up to the allowable maximum. Participants age 50 or older are allowed a $7,500 catch-up contribution amount.

2023 Contribution Limits for 401(k) Plans

The contribution limit increases for the 2023 tax year are larger than in years past.  The maximum compensation limit for determining employer profit-sharing contributions was increased from $305,500 to $330,000, and the plan maximum therefore bumped up from $61,000 to $66,000.

Solo 401(k) contributions are flexible. Both the salary deferral and the profit-sharing contributions are discretionary and can be changed at any time based on business profitability. You may contribute using either method or both, or not make contributions at all for a particular year.

With regard to employee salary deferral contributions, you may elect to categorize these as tax-deferred or choose Roth tax treatment. Employer profit sharing contributions may only be made on a tax-deferred basis.

The contribution limits apply per individual participant. If both you and your spouse have earnings through the business, you may both contribute up to the maximum based on your individual age and income factors.

2022 Contribution Limits for 401(k) Plans

Following are the contribution limits for the 2022 tax year.

Solo 401(k) Contribution Examples – Pass Through Entities – 2022 Limits

When a business is a pass-through entity for taxation, income to the owner is typically classified as distributions, not W-2 wages. Examples would include sole proprietorships, partnerships and LLC’s not electing to be taxed as a corporation.

In this type of arrangement, both the employee salary deferral contribution and the employer profit sharing contribution are based on the amount of Net Adjusted Business Income. Net adjusted business income is calculated by taking gross self-employment income and then subtracting business expenses as well as 1/2 of self-employment taxes.

Employee Salary Deferral Contribution

100% of net adjusted business income, up to the maximum of $20,500, or $27,000 for participants age 50 or older, may be contributed in salary deferrals into a Solo 401(k).

Employer Profit Sharing Contribution

A profit-sharing contribution of up to 20% of net adjusted businesses income may be made. The maximum amount of income that can be used for calculating plan benefits is $305,500.

Example 1

A self-employed realtor operating as a sole proprietor is age 42 with $50,000 of net profit for the year.

Solo 401(k) Contribution Examples – Corporate Tax Entities – 2022 Limits

When a business is taxed as a corporation, compensation to the owner is generally made in the form of W-2 wages. Examples would be a C corporation, or a S Corporation or LLC electing to be taxed as a corporation. Dividends paid to shareholders are not eligible as a source of plan contributions.

Employee Salary Deferral Contribution

100% of W-2 wages, up to the maximum of $20,500, or $27,000 for participants age 50 or older, may be contributed in salary deferrals into a Solo 401(k).

Employer Profit Sharing Contribution

A profit-sharing contribution of up to 25% of W-2 earnings can be contributed into a Solo 401(k). up to the plan maximum.

Example 1

A self-employed contractor operating through a S Corporation is age 38 with $75,000 of W-2 salary.

Example 2

A self-employed salesperson operating through a C Corporation is age 55 with $150,000 of W-2 salary.

Example 3

A husband and wife operate a C Corporation and are the only employees. He is age 50 with $100,000 of W-2 salary. She is age 48 with $100,000 of W-2 salary.

Their combined contributions toward their future retirement total $97,500!

Note that in some cases an individual may not be able to maximize both profit sharing and salary deferral before achieving the plan maximum.

Timelines

A 401(k) must be established by December 31^st of a tax year in order for employee deferral contributions to be made towards that year.  With the passage of the SECURE Act in 2019, a plan can be established until the tax-filing date of the sponsoring employer (including extensions) , bug can only accept employer profit-sharing contributions for the prior plan year.

Profit sharing contributions may look at income for the entire plan year (generally the calendar year).

Employee contributions may only be made from income received after the plan was implemented.

In a corporate tax / W-2 environment, employee salary deferral contributions must be made to the plan with the final paycheck for the tax year (so typically a week into January at most). Employer profit sharing contributions may be made through the corporate tax filing deadline, including extensions (as late as September 15^th).

In a sole proprietor / pass through environment, employee salary deferral contributions and employer profit sharing contributions may be made up until the individual’s tax filing date, including extensions (as late as October 15^th).

This page has been updated to reflect law changes implemented with the SECURE Act of 2019.  Last updated 10/21/2022.