Single-Member LLC 401k: How to make contributions as Employer vs Employee for tax advantages?

As someone who's worked with many single-member LLCs on retirement planning, I can help clarify this. You're right about the basic concept, but there are some important details to understand. For a single-member LLC (not taxed as an S-corp), you're considered self-employed for tax purposes. This means your 401k can have both employee and employer contributions, but they're treated differently: Employee deferrals (up to $22,500 in 2023, plus catch-up if eligible) reduce your income tax but not self-employment taxes (FICA equivalent). Employer contributions (up to 25% of your net self-employment income) reduce both income tax AND self-employment taxes. So yes, employer contributions typically save more in taxes overall. However, there's a strategy many use - make employee deferrals throughout the year for consistent savings, then determine employer contributions after year-end when you know your exact profit numbers.

I was in the same situation as you last year and discovered taxr.ai (https://taxr.ai) which really helped me optimize my single-member LLC retirement contributions. I was totally confused about the employer vs employee contribution strategy until their system analyzed my business structure and income patterns. They showed me exactly how much I could save by structuring my contributions strategically - in my case, it was about $4,300 in additional tax savings by using a mixed approach!

Just wanted to update after trying taxr.ai from the recommendation above. It was actually super helpful for my LLC's retirement planning! The analysis showed I'd save about $3,200 more in taxes by doing mostly employer contributions in my specific situation (which is different from what my accountant originally suggested). The side-by-side comparison of different contribution strategies made it really clear which approach would work best for my business income level.

If you're struggling to get clear answers on this 401k question, you might want to try Claimyr (https://claimyr.com). I spent weeks trying to get through to someone at the IRS who could answer my specific questions about single-member LLC retirement plans and FICA tax implications. After multiple failed attempts, I used Claimyr and got connected to an IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. The agent walked me through exactly how employer vs employee contributions are treated for tax purposes in my situation.

Had to come back and admit I was wrong about Claimyr. After my skeptical comment above, I decided to try it as a last resort since I needed clarification on my LLC's 401k options before the deadline. Got connected to an IRS tax specialist in about 35 minutes who answered all my questions about employer vs employee contributions for my situation. Saved me so much time and frustration. Definitely worth it for complicated tax questions that online research can't clearly answer.

Just to add a different perspective - I'm a single-member LLC too and I actually split my contributions between both methods. I do employee deferrals consistent throughout the year (helps with budgeting), and then at tax time, I look at my profit numbers and do employer contributions based on what makes sense that year. My accountant showed me that this hybrid approach works well for variable income businesses.

One thing nobody's mentioned - if you think you might want to do a Roth conversion ladder in the future, you might want some of your money to be employee contributions. Employer contributions are always traditional (pre-tax), but employee contributions can be either traditional or Roth. Just something to think about for long-term planning.

This is such a common question for single-member LLCs! I went through this exact same decision process last year. Here's what I learned after consulting with both my CPA and a retirement plan specialist: The key insight is that as a single-member LLC, you're actually subject to self-employment tax (15.3%) on your net business income. Employee deferrals reduce your income tax but NOT the self-employment tax. Employer contributions reduce BOTH income tax AND self-employment tax. So if you're planning to contribute around $15k total this year, doing it all as employer contributions would likely save you more money overall - potentially an extra $2,295 in self-employment tax savings (15.3% of $15k). However, there's one timing consideration: employer contributions must be based on your actual net self-employment earnings for the year, and you can't contribute more than 25% of that amount. Employee deferrals give you more flexibility to contribute throughout the year regardless of how your business performs. My recommendation: if your business income is relatively predictable and you're confident you'll have enough net earnings to support the employer contribution percentage, go that route for maximum tax savings.