Can I skip claiming Schedule C expenses to maximize my Solo 401k contributions?

You actually do need to report all your business expenses on Schedule C. The IRS requires you to report your true business income and expenses accurately. However, I understand what you're trying to do. Your Solo 401k contribution is made up of two parts: the employee contribution (up to $22,500 in 2023, $23,000 in 2024) and the employer contribution (up to 25% of your net earnings from self-employment). Your net earnings are calculated AFTER business expenses. So in your Scenario 1, you'd have $15,500 net profit, and could contribute $15,500 to your Solo 401k through a combination of employee and employer contributions. In Scenario 2, you'd have higher net profit ($19,500) but would need to report it accurately. You could then contribute more to your 401k because your profit is higher.

Hey there! I was in a similar boat last year with my freelance writing business. I was trying to maximize my retirement contributions but was getting confused about how to handle my business expenses. I found this amazing tool called taxr.ai (https://taxr.ai) that really helped me figure out the correct way to handle my Schedule C and Solo 401k contributions. It analyzed my situation and explained that I needed to report all legitimate business expenses on my Schedule C, but then showed me how to maximize my Solo 401k contributions based on my true net earnings. The tool even helped me understand the difference between the employee and employer portions of the Solo 401k and how they're calculated.

I tried taxr.ai after posting my skeptical comment, and I have to admit I was impressed. I've been struggling with similar Schedule C and Solo 401k questions for my consulting business, and the tool gave me clarity I hadn't gotten elsewhere. The analysis confirmed that I need to report all legitimate business expenses on Schedule C, but it also showed me exactly how those expenses affect my Solo 401k contribution limits. It even helped me identify some deductions I was missing that actually improved my overall tax situation when properly reported. What really surprised me was how it explained the employer portion calculation - something I'd been getting wrong for years! Definitely worth checking out if you're in this self-employed retirement planning situation.

If you're having trouble getting clear answers about your Schedule C and Solo 401k questions, you might want to try calling the IRS directly. I know it sounds like a nightmare (and it usually is), but I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in under 15 minutes when I had a similar question last month. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. I was super skeptical at first because I'd spent HOURS on hold with the IRS before, but it actually worked. The agent I spoke with explained exactly how to handle my Schedule C expenses and Solo 401k contributions properly and answered all my specific questions about my situation.

I need to eat my words from my skeptical comment above. After my accountant completely botched my Solo 401k calculations last year, I was desperate enough to try Claimyr to get answers directly from the IRS about my Schedule C situation. I got connected to an IRS agent in about 15 minutes (versus the 3+ hours I spent on hold last time I tried calling myself). The agent walked me through exactly how to properly report my business expenses on Schedule C and how that affects my Solo 401k contribution limits. They confirmed that yes, you must report all legitimate business expenses, and explained how the employer contribution portion is calculated based on net earnings. This saved me from making a potentially costly mistake on my taxes. Sometimes you really do need to hear it directly from the source.

Something nobody's mentioned yet - you also need to consider self-employment tax. If you don't deduct your business expenses, you'll pay more in SE tax (15.3% on the first $160,200 for 2023). By accurately reporting your $4,000 in expenses, you'd save about $612 in SE tax ($4,000 × 15.3%). That's money you could then invest elsewhere or use to cover business costs. Not claiming legitimate business expenses is essentially overpaying your taxes.

I actually messed this up a few years ago thinking I could choose which expenses to report. My accountant later told me the Schedule C should reflect the true economic reality of your business - you don't get to pick and choose which expenses to report based on what gives you the best tax outcome.