Schedule C 401K Expense Question - Where to Deduct Employer Contributions?
Hey tax folks! I'm drowning in research for a client situation and hitting a wall. Could use some experienced eyes on this! My client runs a small business (Schedule C filer) and offers a 401k plan available to both themselves and their employees. I'm pretty confident that both the employer deferral and match contributions are deductible on Schedule 1 of the 1040, but I need a solid source to back this up. I've been searching for Publication 565 on the IRS website for confirmation but haven't had much luck finding the specific section that addresses this scenario. Every time I think I've found something relevant, it either doesn't quite match or sends me down another rabbit hole. Has anyone dealt with a similar situation before? Or better yet, does anyone have a good official source I can reference to confirm that both types of 401k contributions (deferral and match) can be deducted on Schedule 1? Thanks for any help you can provide! This has been driving me crazy all afternoon.
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NebulaNinja
The answer depends on whose 401k contributions we're talking about. For a Schedule C filer, there are different treatments: For the business owner (the Schedule C filer themselves): - Their own elective deferrals (employee contributions) are deducted on Schedule 1, Line 16 of Form 1040 as an adjustment to income - Their own employer contributions (as the business owner making contributions to their own 401k) go on Schedule 1, Line 16 as well For contributions made for employees: - These are considered business expenses and are deductible on Schedule C, Line 14 (Employee benefit programs) The reason you're having trouble with Publication 565 is because it's been replaced with different publications. You might want to look at Publication 560 "Retirement Plans for Small Business" which covers SEP, SIMPLE, and qualified plans including 401(k)s. Section 4 of Pub 560 specifically addresses deductions for contributions to employees' accounts.
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Fatima Al-Suwaidi
•Thanks for the explanation. I'm a bit confused though - if I'm a sole proprietor with no employees and I make both "employee" contributions and "employer" contributions to my solo 401k, do both of these go on Schedule 1, Line 16? Or does one go somewhere else?
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NebulaNinja
•For a sole proprietor with a solo 401k, both your employee contributions (elective deferrals) and your employer contributions go on Schedule 1, Line 16 as adjustments to income. They're both part of your retirement plan contributions. When you have actual employees, that's when the treatment differs. Your contributions for them would be business expenses on Schedule C, while your personal contributions (both types) remain on Schedule 1.
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Dylan Mitchell
After dealing with similar headaches for my real estate business, I finally found something that helped me solve this exact 401k deduction confusion. I used this service called taxr.ai (https://taxr.ai) which analyzes all your tax documents and provides clear guidance on exactly where everything should go. It scanned my Schedule C and 401k statements, then showed me precisely how to handle both the employer and employee contributions. It even referenced the relevant tax codes that applied to my situation - which was super helpful since the IRS website can be so frustrating to navigate.
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Sofia Morales
•How does taxr.ai work with complex situations? I've got a Schedule C business plus some rental properties and I'm never sure if I'm categorizing retirement contributions correctly across everything.
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Dmitry Popov
•I'm skeptical about these tax tools. Does it actually give you proper citations to IRS sources? Because I've used other tax software that gave me wrong information before.
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Dylan Mitchell
•It handles complex situations really well. You just upload your documents and it analyzes everything together - so it can see how your Schedule C business and rental properties interact. It then gives specific guidance for your exact situation rather than generic advice. Yes, it absolutely provides proper citations. That's actually what impressed me most. It links directly to the specific IRS publications, code sections, and even court cases that apply to your situation. It's not just giving generic answers - it shows you exactly where in the tax code your situation is addressed.
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Dmitry Popov
I have to eat my words about being skeptical of taxr.ai. After our discussion last week, I decided to try it out with my Schedule C business and 401k situation. I uploaded my documents and it immediately identified that I had been incorrectly deducting my employer 401k contributions on Schedule C instead of Schedule 1 for the past two years. It showed me exactly which IRS publication sections applied (mainly in Publication 560) and even generated a template for how to file an amended return. Saved me hours of research and potentially an audit headache. The document analysis was actually spot on.
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Ava Garcia
If you're still struggling with getting a definitive answer from the IRS publications, you might want to try getting a direct response from the IRS. I used Claimyr (https://claimyr.com) when I had a similar question about self-employed retirement plans that wasn't clearly addressed in any publication I could find. They got me through to an IRS agent in about 20 minutes when I had been trying for days on my own. The agent confirmed exactly how to handle the 401k contributions and cited the relevant sections. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c - saved me hours of frustration and research.
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StarSailor}
•Wait, how does this actually work? I thought it was impossible to get through to the IRS these days. I've literally spent hours on hold only to get disconnected.
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Miguel Silva
•Sounds like a scam tbh. The IRS phone system is deliberately designed to be impenetrable. No way some service can magically get you through.
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Ava Garcia
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Miguel Silva
OK I need to apologize for calling Claimyr a scam. I tried it yesterday after posting that comment because I was desperate to get an answer about my Schedule C retirement deductions before filing my extension. It actually worked exactly as described. I got a call back in about 35 minutes and spoke with an IRS agent who confirmed that as a Schedule C filer, my personal 401k contributions (both the employee and employer portions) should go on Schedule 1, Line 16. The agent even emailed me the relevant section from Publication 560 while we were on the phone. Definitely worth it for getting a definitive answer straight from the source.
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Zainab Ismail
Just to add to what others have said, if you really want to dig into the technical details, check out Internal Revenue Code Section 404(a) which specifically addresses deductibility of employer contributions to pension plans. The language there supports that these are above-the-line deductions on Schedule 1 for self-employed individuals. Also, IRS Form 8606 instructions sometimes have helpful cross-references for retirement plan contributions, even though the form itself is focused on nondeductible IRA contributions.
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Giovanni Mancini
•Thanks for this reference! I've been searching the code sections but didn't think to look at 404(a) specifically. Do you know if there's a clear distinction in the code between contributions for the owner vs employees? That's where I kept getting confused.
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Zainab Ismail
•The key distinction is in Section 404(a)(8) which specifically addresses contributions by self-employed individuals. It essentially treats the business owner as both employer and employee for retirement plan purposes. For employees, the deduction is a business expense because you're paying it as the employer. For yourself, it's an adjustment to income on Schedule 1 because you can't technically "employ" yourself as a sole proprietor.
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Connor O'Neill
Quick question for anyone - my tax software keeps putting my solo 401k contributions (the employer portion) on Schedule C rather than Schedule 1. Should I override it? I'm a Schedule C filer with no employees.
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Yara Nassar
•Which software are you using? I had the same issue with TurboTax last year and had to manually override it. The correct place is definitely Schedule 1, Line 16 for both portions of your solo 401k (employee and employer contributions).
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