Can my Single Member LLC deduct SEP IRA contributions on Schedule C?

Wait, so I still get to deduct the full contribution amount, just not on Schedule C? Does that mean I still have to pay self-employment tax on that money? And does this apply to solo 401ks too or just SEP IRAs?

Yes, you still get to deduct the full contribution amount as an adjustment to income on Schedule 1, but not as a business expense on Schedule C. This means you will pay self-employment tax on that money since self-employment tax is calculated based on your net Schedule C income before the retirement contribution deduction. This same treatment applies to Solo 401(k) contributions as well as SEP IRAs. For both retirement plans, the employee contribution portion is deducted on Schedule 1 rather than Schedule C. If your Solo 401(k) has employer contributions (which you can make as the business owner), those are also deducted on Schedule 1, not Schedule C.

That sounds helpful. Does it work for other self-employed retirement plans too? I have a Solo 401k and get confused about where to deduct what every single year.

Does it actually give you advice or just flag issues? I've tried tax software that claims to do this but it just tells me there's a problem without explaining how to fix it.

It absolutely works for Solo 401k plans too. It breaks down the difference between employee and employer contributions and shows exactly where each should be reported. The tool even calculates your maximum allowed contributions based on your business income. The tool definitely gives specific advice, not just flags. When I uploaded my return, it specifically told me that my SEP IRA deduction needed to be moved from Schedule C to Schedule 1, explained why, and showed me the exact line number where it should go. It also explained the tax implications of making this change (still saving on income tax but not on self-employment tax).

How does this service even work? I thought it was impossible to get through to the IRS without waiting for hours. Is this some kind of special line or priority service?

Sounds like a scam tbh. No way some third-party service can magically get you through the IRS phone tree when millions of people can't get through. Did they make you pay before connecting you?

The service uses an automated system that navigates the IRS phone tree and waits on hold for you. When they reach a live agent, you get a call to connect with them. It's essentially like having someone wait on hold for you, so you don't have to waste hours with your phone to your ear. They do charge for the service, but you only pay if they successfully connect you with an agent. There's no special line or priority access - they're just automating the painful waiting process. For me, it was absolutely worth it to get definitive answers directly from the IRS about my SEP IRA questions.

What's the advantage of SEP IRA vs Solo 401k in this case? I keep hearing Solo 401k lets you contribute more somehow?

The main advantage of a Solo 401k over a SEP IRA is that a Solo 401k allows two types of contributions: employee contributions (up to $23,000 in 2024, plus $7,500 catch-up if you're over 50) AND employer contributions (up to 25% of compensation). With a SEP IRA, you're limited to just the employer contribution portion (approximately 20% of net profit). This means that at lower income levels, you can typically contribute more to a Solo 401k than a SEP IRA. For example, if your net business profit is $50,000, with a SEP IRA your maximum contribution would be around $9,300. With a Solo 401k, you could contribute $23,000 as an employee contribution plus about $9,300 as an employer contribution, for a total of $32,300.

At what income level does switching to an S-Corp typically make sense? I've heard conflicting advice about this.

The general rule of thumb I've heard from multiple CPAs is that S-Corp election typically becomes beneficial when your net business profit exceeds $60,000-$80,000, but it really depends on your specific situation. The break-even point depends on several factors: - The additional costs (payroll processing, more complex tax prep, state fees) - What constitutes a "reasonable salary" in your industry - Your state's treatment of S-Corps (some states don't recognize the federal S-Corp election) For example, if you're making $100,000 profit and can justify a $60,000 salary, you'd save self-employment tax on the $40,000 in distributions. At the current 15.3% SE tax rate, that's about $6,120 in savings, minus the additional S-Corp costs. I'd recommend consulting with a CPA who can run the numbers for your specific situation. The analysis gets more complex when you factor in things like health insurance deductions, retirement contributions, and state tax implications.

This is really helpful context! I'm actually in a similar situation and trying to decide between SEP IRA and Solo 401k for next year. When you mention that Solo 401k might make more sense at lower income levels, what's the rough break-even point? My LLC profit this year will be around $45,000 and I'm trying to figure out which retirement plan would let me contribute more.

@f3e2e4708cad Great breakdown! For someone with $45,000 in LLC profit, a Solo 401k would definitely allow higher contributions. With a SEP IRA, you'd be limited to about 20% of net earnings (roughly $9,000). But with a Solo 401k, you could contribute up to $23,000 as an employee contribution plus the employer portion (around 20% of net earnings), potentially allowing you to contribute your entire profit if you wanted to. The Solo 401k becomes especially advantageous at lower income levels because the employee contribution portion ($23,000 limit) doesn't depend on your business income percentage. Just keep in mind that Solo 401ks require more administrative work - you'll need to file Form 5500-EZ once your account balance exceeds $250,000. Also remember that regardless of which plan you choose, the contributions still go on Schedule 1, not Schedule C, so you won't save on self-employment tax either way.