self-employment earnings and "employer" contributions

I'm unclear as to what to record as self-employment income as a sole proprietor. How do I record $150K income (before self-employment taxes) and $28,000 profit-sharing contribution (from that $150K income) to my Solo 401k?


dan royer's picture

The self-employment income of 150K should be entered as 150K of self-employment income. The program will get your taxes right.

I'm not sure what the 28K of profit sharing contribution is about. You are getting 122K of self-employment income and 28K from profit sharing that is taxed differently? Or is it taxed like self employment income?

Dan, if I'm self-employed as a sole proprietor and I have a solo 401k, I'm allowed to give myself up to 20% of my revenue as "profit sharing". That's tax-deferred in the same way an employer match to a regular 401k is. It's in addition to my elective deferral as an "employee".

Being over 50, I can contribute up to $61K to my Solo 401k account. While that is tax deferred as far as FIT is concerned, I think you still have to pay payroll taxes on the entire amount (after business expenses).

So, my question is how to record $150K self-employed earnings in ESP so as to capture all payroll tax, while also discounting that income by the amount of the "employer" portion of my 401k contributions so I don't pay FIT prematurely.

Also, if I record all $150K of revenue on the earnings tab, and record $36.5K as employer contributions to retirement accounts, does that not overstate total income? (Ordinary income + tax-deferred.)

Other things come into play like being take 1/2 of the self-employed payroll taxes as a deduction on my Schedule C. There's another tax item in there, as well, but it's small compared to double-counting $36K in income, or paying FIT on that portion of my gross revenue when I shouldn't.

Solo 401k Contribution Limits and Types for an outline of Solo 401ks.

Solo 401(k) Plan Maximum Contribution Calculator to calculate allowed employer profit-sharing contribution to my 401k.

I think I figured this out. I recorded the entire $150K as self-employment income, which captures self-employment payroll taxes correctly. I have no wages in that year and no employer contributions outside my Solo 401k.

I then recorded $52,502 as individual deductible contributions representing the total of $24,500 individual contribution limit and $28,002 of "profit-sharing" (from myself to myself) contribution. I determined that contribution amount here, using 2018, 150K income and age 62 as inputs. I didn't record any employer contributions separately.

Adjustments to income seen on the Federal Taxes - Joint Filer detail report seem to reflect a reduction of taxable income by the amount of the total retirement account contribution. Other things may be included, and ESP may impose some upper limits that are not explicit.

Assuming Mike is the tax expert, can you ask him to validate my approach?

Hi, Please enter your proprietorship income as self employment income and your profit sharing as a 401(k) employer contribution (Won't matter if you say it's an employee contribution.).

Call with questions -- 617 834 2148.

best, Larry

It works only if I record my proprietorship income as self employment and combine my elective 401k contribution and 'profit-sharing' contribution as a single 'employee' contribution. In that case, it works well. AGI goes down by teh amount of the total contribution and the profit-sharing portion is not treated as an exogenous income.

Edit: corroboration can be found in IRS Pub 560, Ch 5, p 22. The combined total of elective deferrals and employer contributions are entered on Form 1040, line 28. It is one of the adjustments used to reduce total income.

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