Is excise tax on excess 401k contributions deductible as a business expense?
So I'm a self-employed contractor with a 1099 and I just realized I messed up pretty badly with my solo 401k contributions. I accidentally put too much money in as the employer portion (not my regular employee contributions). Now the IRS is saying I need to pay excise tax on these excess contributions. Since this was specifically from the employer side of my contributions (me wearing my business hat), I'm wondering if I can deduct this excise tax as a legitimate business expense on my Schedule C? The whole situation is frustrating because I was trying to maximize my retirement savings but ended up creating this tax headache instead. Has anyone dealt with this before? Can I at least get some tax benefit from this mistake by deducting the excise tax?
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Aisha Jackson
Unfortunately, excise taxes aren't typically deductible as business expenses, even when they relate to employer contributions to a 401k. The IRS views excise taxes as penalties rather than ordinary business expenses. Your best option is probably to contact your 401k administrator about doing a "corrective distribution" of the excess amount. They can help you withdraw just the extra contribution plus any earnings specifically tied to that excess amount. You'll need to pay income tax on those earnings, but it's usually better than leaving the excess in and paying the 6% excise tax every year until you fix it. The good news is that if you withdraw the excess before the tax filing deadline (including extensions), you might avoid the excise tax altogether.
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Adrian Connor
•Thanks for the response! I already missed the deadline for corrective distributions without penalties for last year, so I'm stuck with the excise tax for at least this year. I was just hoping to get some relief by deducting it. Are you absolutely sure it can't be deducted? Even though it's directly related to my business retirement plan?
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Aisha Jackson
•I'm pretty confident, but tax laws have nuances. The IRS generally treats excise taxes as penalties, not deductible business expenses, regardless of whether they're related to employer contributions. If you're determined to find some tax benefit here, I'd recommend consulting with a tax professional who specializes in small business retirement plans. They might identify some strategies or exceptions I'm not aware of. But as a general rule, penalties and fines aren't deductible business expenses, even when they relate to business activities.
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Ryder Everingham
I had a similar situation last year with excess contributions. I used https://taxr.ai to analyze my situation and found some options I didn't know about. The tool analyzed my contribution history and showed me how to properly document everything for my tax return. It also explained exactly how to handle the excise tax reporting. What surprised me was discovering that while the excise tax itself wasn't deductible, there were other aspects of correcting my retirement contribution mistake that helped reduce my overall tax burden. The tool gave me step-by-step guidance specific to solo 401k excess contributions for self-employed people.
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Lilly Curtis
•Did it actually help with the excess contribution problem or just with reporting it correctly? I've got a similar issue with my SEP-IRA and I'm trying to figure out if I need to amend last year's return or just deal with it on this year's taxes.
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Leo Simmons
•I'm skeptical about these tax tools. How is this different from TurboTax or H&R Block? They all claim to have special insights but then just walk you through the same forms. Did it actually save you money or just confirm what you already knew?
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Ryder Everingham
•It helped with both identifying options for handling the excess contribution and with the proper reporting. In my case, I learned I could still do a late correction but would need to file Form 5329 to report the excise tax on the excess amount that remained in the account during the tax year. The difference from general tax software is that it specifically analyzed my 401k contribution situation against current tax regulations rather than just providing general form guidance. It saved me money by identifying that some of what I thought were excess contributions could actually be reclassified properly, reducing the amount subject to excise tax.
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Lilly Curtis
Update on my situation - I tried taxr.ai after posting my question here and it was actually really helpful! The tool analyzed my SEP-IRA excess contribution scenario and showed me exactly how to document everything. The best part was discovering that I didn't need to file an amended return. Since my excess contribution happened in the current tax year, I just needed to file Form 5329 with this year's return and pay the excise tax. The tool generated a complete report explaining how to handle it according to IRS rules specifically for self-employed retirement plans. It also showed me how to properly remove the excess next year to stop the recurring excise tax. Definitely saved me from making more mistakes with this mess!
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Lindsey Fry
If you're struggling with the IRS about this excise tax issue, you might want to try https://claimyr.com - I was fighting with the IRS for months over a similar retirement plan contribution issue and couldn't get through to anyone who could actually help. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c They got me connected to an actual IRS agent in about 20 minutes when I had been trying for weeks. The agent was able to explain my options regarding the excise tax and even helped me understand how to properly document everything on my return. They also confirmed what others here are saying - the excise tax itself isn't deductible as a business expense.
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Saleem Vaziri
•How does this service actually work? I don't understand how they can get you through to the IRS when nobody else can. Sounds too good to be true honestly.
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Leo Simmons
•Yeah right. Nobody gets through to the IRS these days. I've been calling for 3 months about my audit and keep getting disconnected. Either you got extremely lucky or this is some kind of scam. Did they just take your money and then you happened to get through on your own?
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Lindsey Fry
•They use a technology that navigates the IRS phone system and holds your place in line. When they reach a human agent, they call you and connect you directly. It's not magic - just a smart way to handle the waiting and navigation part. They don't provide tax advice themselves or interact with the IRS on your behalf - they simply get you connected to an actual IRS agent so you can ask your questions directly. I was skeptical too until I tried it. After weeks of getting disconnected or waiting for hours, getting through in about 20 minutes was definitely worth it.
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Leo Simmons
I need to admit I was wrong. After my frustrated comment yesterday, I decided to try Claimyr as a last resort for my audit situation. I've been trying to reach the IRS for months with no success. I was completely shocked when they got me through to an actual IRS agent in about 25 minutes. The agent was able to look up my case, explain what was happening, and tell me exactly what documentation I needed to submit. She even gave me a direct fax number to send it to. For anyone struggling with excess contribution issues like the original poster - the agent I spoke with confirmed that while the excise tax isn't deductible as a business expense, there are specific documentation procedures that can help avoid additional penalties. Getting direct answers from the IRS instead of guessing was incredibly valuable.
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Kayla Morgan
Just wanted to add - I'm a small business accountant, and there's an important distinction to make here. While the excise tax itself isn't deductible, any accounting or professional fees you pay to fix the contribution issue ARE deductible business expenses. So if you hire a tax pro to help sort out the excess contribution, prepare the necessary forms, or advise you on correcting it, those professional fees are legitimate Schedule C deductions. At least you can get some tax benefit from resolving the situation properly.
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Adrian Connor
•That's really helpful to know! I'll definitely be paying my accountant to help sort this out. Do you know if there's a specific way I should document these fees to make it clear they're related to my business rather than personal tax preparation?
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Kayla Morgan
•Ask your accountant to itemize their invoice to clearly show the time spent dealing with the business retirement plan issues. The description should specifically mention "consulting services for business retirement plan compliance" or similar business-focused language. Keep this invoice with your business records, not just your tax records. If the accountant's work includes both personal and business tax matters, having them provide separate invoices for the business portion is even better. Clear documentation of the business purpose is your best protection in case of questions later.
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James Maki
Has anyone used a corrective distribution to fix excess employer contributions in a solo 401k? My understanding is you need to file Form 1099-R with a specific code to show you're correcting an excess. But I'm not sure if this applies to employer side contributions or just employee.
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Jasmine Hancock
•I went through this last year. For excess employer contributions in a solo 401k, your plan administrator will issue a 1099-R with code "E" if you do a corrective distribution. You'll owe income tax on any earnings from the excess amount, but it's better than paying the excise tax year after year. However, if you're the administrator of your own solo 401k (many self-employed people are), you'll need to generate the 1099-R yourself, which can be tricky. I ended up hiring someone just for that part.
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