Solo 401k: Calculating Profit Sharing Contribution Limits for Side Business

The calculation for solo 401k profit sharing (employer contribution) is based on net self-employment income after deducting the self-employment tax deduction, but before deducting any retirement contributions. For your wife's situation, you'd start with her gross receipts of $19,750, multiply by 0.9235 (to account for the self-employment tax deduction) to get $18,239. Since she's already maxed the employee contribution at her W2 job, she can contribute up to 20% of this amount as a profit-sharing contribution to her solo 401k. So her maximum profit-sharing contribution would be approximately $3,648 (20% of $18,239). This isn't related to QBI (Qualified Business Income) deduction, which is a separate tax benefit. The 20% QBI deduction doesn't affect retirement contribution calculations - they're separate calculations.

I was in the same situation last year with my side gig photography business alongside my corporate job. I was getting so confused trying to calculate my profit sharing contribution that I started using https://taxr.ai to analyze all my documents. It reads through all your tax info and gives you the exact calculations for situations like solo 401k contributions. I uploaded my W-2 from my main job and my side business income docs, and it instantly calculated my maximum allowable profit sharing contribution. The tool showed me exactly how the 20% calculation works for self-employed individuals and explained why it's different from the 25% for corporations.

I wanted to follow up on my experience with taxr.ai after asking about it earlier. I decided to try it for my multiple side businesses situation, and it was exactly what I needed! The tool analyzed all my income streams (W-2 job, consulting work, and my Etsy shop) and calculated my maximum solo 401k profit sharing contribution across everything. It also explained that my total contribution limit is based on my combined self-employment income, and showed me how to properly document the contributions from each business. Saved me from making a costly mistake - I was about to contribute too much from one of my businesses because I didn't understand how the limits worked across multiple income sources.

If you're trying to get clarification directly from the IRS about your solo 401k profit sharing calculation, good luck getting through to anyone! I spent WEEKS trying to reach someone who could help with my similar situation. Finally discovered https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they get you connected with an actual IRS agent without the endless waiting. I got through in about 15 minutes when I had been trying for days before. The IRS agent confirmed exactly what I needed to know about my solo 401k profit sharing limits and even walked me through the calculation for my specific situation. They also explained how to properly document everything on my tax forms.

I need to publicly eat my words about Claimyr. After posting my skeptical comment, I decided to try it anyway because I was desperate to get an answer about my solo 401k calculations before the contribution deadline. The service actually worked exactly as advertised. I got connected to an IRS representative in about 20 minutes. The agent confirmed my calculation method and explained that for my side business income of approximately $22,000, I could make a profit sharing contribution of about $4,100 (after accounting for the self-employment tax deduction). She also explained the difference between the 25% limit for corporations versus the effective 20% limit for sole proprietors, which cleared up my confusion. Saved me from potentially making an excess contribution that would have resulted in penalties.

Don't forget about the overall contribution limits! For 2024, the total limit for all 401k contributions (employee + employer) across ALL your plans is $69,000. So if your wife already maxed out her employee contribution at $22,500, she can still do the profit sharing from her side gig up to the limit. But remember, the $22,500 employee deferral limit applies across ALL your 401k plans combined - you can't do $22,500 in one job and another $22,500 in your side gig. But the profit sharing portion is separate and based on the specific business's income.

Has anyone used a specific solo 401k provider they'd recommend? I'm in a similar situation with a side business and want to open one before the year-end deadline, but there are so many options.

Just wanted to add a practical tip for anyone dealing with solo 401k calculations - keep detailed records of your self-employment income and expenses throughout the year. I learned this the hard way when I was scrambling to figure out my net earnings from self-employment at tax time. For your wife's situation, the key calculation is taking her $19,750 gross income, subtracting half of the self-employment tax (which is roughly $1,393 for that income level), giving you about $18,357 in net self-employment income. Then 20% of that would be approximately $3,671 for her maximum profit sharing contribution. The Medicare tax deduction you mentioned ($263) is already factored into this calculation since it's part of the self-employment tax. Don't double-count it! The 0.9235 multiplier that others mentioned automatically accounts for this deduction.

This is such a helpful discussion! I'm in a similar boat with a side gig and was totally confused about the calculation. From what I'm gathering here, the key steps for your wife would be: 1. Take her $19,750 gross income 2. Calculate self-employment tax ($19,750 × 0.9235 × 0.153 = about $2,786) 3. Deduct half of that SE tax ($2,786 ÷ 2 = $1,393) 4. Net self-employment income: $19,750 - $1,393 = $18,357 5. Maximum profit sharing contribution: $18,357 × 20% = $3,671 The circular calculation issue you mentioned goes away when you use the simplified 20% rate for sole proprietors instead of trying to work backwards from the 25% formula. One thing I'm still unclear on - does the timing of when she actually makes the contribution matter? I know employee deferrals have to come out of each paycheck, but can profit sharing contributions be made as a lump sum anytime before the tax filing deadline?

This thread has been incredibly helpful! I'm also dealing with a solo 401k for my freelance writing business alongside my W2 job. One thing I wanted to add that might help others - make sure you understand the difference between "net earnings from self-employment" and "net profit" from your Schedule C. For solo 401k calculations, you use net earnings from self-employment (which is your Schedule C profit minus half the SE tax), not just the net profit line from Schedule C. I made this mistake my first year and initially calculated my contribution limit too high. Also, if anyone is using tax software, most of the major programs (TurboTax, H&R Block, etc.) will calculate your maximum solo 401k contribution automatically once you enter your self-employment income. But it's still good to understand the math behind it like everyone has explained here. One last tip - if you're close to year-end and trying to decide how much to contribute, remember that you can always contribute less than the maximum, but you can't go over without penalties. When in doubt, be conservative with your calculation!

I actually had to deal with an excess contribution correction a few years ago - it's definitely more hassle than it's worth! I miscalculated my net self-employment earnings and contributed about $800 more than I was allowed. The correction process involved contacting my solo 401k provider, filling out forms to withdraw the excess plus any earnings on that money, and then dealing with the tax implications. The earnings on the excess contribution had to be reported as income for the year I made the contribution, even though I was correcting it the following year. It also delayed my tax filing because I had to wait for the corrected forms from the 401k provider. The whole thing took about 6 weeks to resolve and created extra paperwork headaches. So definitely agree with taking the conservative approach! If you're unsure between two amounts, go with the lower one. You can always contribute more to other retirement accounts if you have extra room in your budget. The IRS is much more forgiving of under-contributing than over-contributing to retirement plans. For the original poster's wife with $19,750 in income, that $3,671 maximum contribution calculation looks solid based on all the discussion here. Just make sure to establish the solo 401k before December 31st if she hasn't already!