How to Calculate Solo 401k Contributions for Self-Employed with No Employees?

You're on the right track, but there are actually two components to Solo 401k contributions that many self-employed folks miss! As a sole proprietor, you wear two hats - you're both the employer and the employee. This means you can make TWO types of contributions: 1) The employer contribution (what you calculated at about 20% of net profit after SE tax adjustment) AND 2) The employee contribution (up to $22,500 for 2023, plus catch-up if you're over 50). So even though you don't pay yourself with a W-2, you can still make that employee contribution as if you were paying yourself a salary. The total maximum would be your calculated employer portion plus the employee contribution (up to the annual limits, which are quite generous). Just remember your total contributions can't exceed your net self-employment income, and there are overall annual limits to be aware of.

I went through this exact same headache last year with my freelance photography business. After hours of research, I found this amazing tool called taxr.ai (https://taxr.ai) that completely simplified the Solo 401k calculation process for me. What I love about it is that it analyzes your specific self-employment situation and shows you exactly how much you can contribute as both the "employer" and "employee" - which is something I didn't even realize was possible at first! It also explains how the 20% calculation works with the SE tax deduction in plain English. Saved me from making a $4,000 calculation error on my contributions.

Just wanted to follow up and say I tried taxr.ai after reading about it here. Wow! It answered questions I didn't even know I had about my Solo 401k. Turns out I've been MASSIVELY under-contributing for the past two years because I didn't understand I could make both employer AND employee contributions. The tool showed me that with my income of around $75k from my consulting business, I could potentially put away over $36k this year between both contribution types. That's literally thousands more than what my previous calculations showed. Already adjusted my contribution strategy for the rest of the year to catch up!

If you're having issues getting clear guidance on your Solo 401k calculations, I totally feel your pain. After trying to get through to the IRS for WEEKS with questions about my self-employed retirement options, I discovered Claimyr (https://claimyr.com). They got me connected to an actual IRS representative in under 45 minutes when I'd been trying for days on my own. The IRS agent walked me through exactly how the Solo 401k calculations work for someone in my situation (designer with occasional 1099 contract work). If you want to see how it works, there's a quick demo video: https://youtu.be/_kiP6q8DX5c For complicated tax questions like retirement contributions, sometimes you just need to speak directly with the IRS, and this made it possible without the endless hold music!

I need to eat my words about that Claimyr service. After dismissing it as BS, I was desperate enough to try it last week for my ongoing tax transcript issue. Got connected to an IRS agent in about 35 minutes when I'd literally been trying for MONTHS on my own. The agent was able to answer all my questions about my Solo 401k contribution limits as a self-employed person with multiple income sources. Turns out I was overthinking it - the calculation isn't nearly as complicated as I thought. For anyone wondering, they confirmed you CAN make both the employer contribution (the ~20% profit calculation) AND the employee contribution (up to $22,500) even without paying yourself a formal W-2 salary. Rarely admit when I'm wrong, but... I was wrong about this service.

Something nobody has mentioned yet that tripped me up when I first started my Solo 401k - the deadline for establishing the plan is December 31st, but you can actually make contributions for the previous year up until your tax filing deadline (usually April 15th or Oct 15th with extensions). Also, the employee contribution portion needs to be done by December 31st, while the employer portion can be done up until tax filing deadline. The timing differences messed me up my first year.

I see a lot of great math advice here but nobody's mentioned WHERE to actually set up your Solo 401k. After a ton of research, I went with Fidelity for mine because they don't charge any setup or maintenance fees and their investment options are solid. Vanguard is another good option. Avoid the ones that charge annual fees if possible - those fees eat into your returns over time!

Just wanted to chime in as someone who went through this exact confusion last year! Your math looks right - the ~20% calculation after SE tax adjustment is correct for the employer contribution portion. But like others mentioned, you're missing the huge opportunity of the employee contribution side. What really helped me understand it was thinking of it this way: as a sole proprietor, you're literally both the boss AND the worker. The "boss" you can contribute about 20% of net profit (employer contribution), and the "worker" you can defer up to $22,500 of your earnings (employee contribution) - even without a formal payroll setup. So with your $13,500 profit, you could potentially contribute your calculated $1,675 PLUS up to $13,500 more as an employee deferral (limited by your total net income). That's a massive difference in retirement savings potential! Just make sure you establish the plan by Dec 31st if you want to contribute for this tax year.