Everyone gets panicky as the tax payment time approaches. Many Solo 401(k) account holders vehemently look for a deadline every taxable year regarding their employer and employee deferral contributions. After all, this retirement saving plan allows you to protect your income more. While Solo 401(k) has been around for years, some people still find it intimidating to manage everything. Let’s make things a little simple first.
Employee deferral and employer profit-sharing contributions
A SEP IRA is only a profit-sharing retirement plan, while Solo 401(k) offers two features: contributions as an employer and as an employee. You can peer through solo401k.com for help with this account type. Once you open the account, you can make pretax contributions as an employee of your business. The contribution limit is USD $20,500 for 2022 and USD$ 22,500 for 2023. Fifty years older and more can add USD $27,000 for 2022 or USD $30,000 for 2023. As for employer profit-sharing-based contributions, sole proprietors and single-member LLCs can infuse 20%, and a self-employed person can contribute up to 25%. Remember, as per the rule, these two contributions should amount to USD $66,000 overall and not more. People aged 50 and more can contribute USD$73,500 overall. For 2022, these limits stand at USD $61,000 and USD $67,500, respectively.
The SECURE Act 2019
Under this new act, you can make only employer profit-sharing contributions for the last year in your 2023 Solo 401(k) plan. However, if you set up your account in 2022, you can contribute both as an employee and an employer in 2023. Sole proprietors can open their 401(k) plan in 2023 for 2022 contributions before filing Form 1040. The due date for the tax return is April 15, 2023. In the case of an extension request, it will be October 15, 2023. But only employer contributions are permissible because you will open your account in 2023. A single-member LLC can also open an account for 2022 in 2023 till it files IRS Form 1040. Filing and extension schedules are the same. Rules regarding the contribution limits are also similar.
Do you own a partnership business? If an LLC has two or more persons, the company will be subject to partnership-based income tax rules. You will file IRS Form 1065 and state tax. The due date is March 15, 2023. If extended, you can file your tax on September 15, 2023. A multiple-member LLC can open its self-employed 401(k) plan for the previous year in 2023 before submitting Form 1065. Again, it allows the employer-based profit-sharing contribution.
Furthermore, a C corporation submits Form 1120 to report its taxes. Their original and extended deadlines for tax filing are April 15, 2023, or by October 15, 2023. An S corporation can file Form 1120 by March 15 or September 15. If any of these corporations open their accounts in 2023 for 2022 contributions, they can contribute 25% of their income as employer contributions.
If you look closely, one thing is clear you benefit more when you open your account in the taxable year. Delays prevent you from saving tax money. So, the best way to take full advantage of your Solo 401(k) is to act on it as soon as possible.