Solo 401k - Do I Max Employee or Employer contributions first? Any FICA effects?

[tpac]

I am a member of a partnership with two employees who also file a joint personal return. Our ordinary business income for 2016 is $58,000. I would like to contribute $18,000 for each employee to our solo 401(k) plan. In this case would it be best to (1) max our employee contributions at $18,000 each or (2) max the employer contribution at $5,000 each + an additional $13,000 each as an employee contribution?

Also, do I pay FICA taxes on employer contributions to my partnership's solo 401(k) plan? If I'm reading the 1065 correctly it appears that maximizing the employer contribution will reduce our business income and will in turn flow through to reduced K1 incomes and lower FICA taxes, but common sense tells me I shouldn't be able to reduce my FICA burden this way...

[DavidAnnArbor]

I didn't realize if you had employees and was in a business partnership you were allowed to have a Solo 401k plan.

[tpac]

I didn't realize if you had employees and was in a business partnership you were allowed to have a Solo 401k plan.

We're married so it's not an issue - we just need to keep employer contributions equal.

Can anyone comment on my original question - do employer contributions to a solo 401k reduce your self employment tax / FICA burden?

[Heroes821]

I don't know but I had the same question myself. I heard that the Employer match for the solo 401k lowers MAGI just like normal 401k contributions though.

[bacchi]

They act as the same. The only difference is that one has a hard limit and one is a percentage of earnings.

[dandarc]

Neither employee nor employer contributions to a soloK reduce self employment tax, if you're a sole proprietor or a general partnership.  If you are incorporated, then employer contributions get recorded as a business expense, so in that case yes.

However, you may have run into a gotcha here.  You must declare your employee deferral before the end of the year.  You then have until your tax filing deadline to actually make the contribution.  You can make employer contributions up to your tax filing deadline.  Since the employer side is limited to about 18.5% of your schedule C net income (20% of schedule C less 1/2 self employment tax), you might only be able to do about $6K each here.

http://www.sensefinancial.com/services/solo401k/solo-401k-contribution/

[tpac]

They act as the same. The only difference is that one has a hard limit and one is a percentage of earnings.

Am I mistaken in believing that the employer contribution is deducted on the employer return (eg. 1065) which reduces actual employee total income and not just AGI? This seems like a significant (and possibly undesirable) difference.

[tpac]

Neither employee nor employer contributions to a soloK reduce self employment tax, if you're a sole proprietor or a general partnership.  If you are incorporated, then employer contributions get recorded as a business expense, so in that case yes.

I have a partnership that is an LLC - not filing as an S-Corp though.

However, you may have run into a gotcha here.  You must declare your employee deferral before the end of the year.  You then have until your tax filing deadline to actually make the contribution.  You can make employer contributions up to your tax filing deadline.  Since the employer side is limited to about 18.5% of your schedule C net income (20% of schedule C less 1/2 self employment tax), you might only be able to do about $6K each here.

I've already made a significant employee contribution.

[dandarc]

They act as the same. The only difference is that one has a hard limit and one is a percentage of earnings.

Am I mistaken in believing that the employer contribution is deducted on the employer return (eg. 1065) which reduces actual employee total income and not just AGI? This seems like a significant (and possibly undesirable) difference.

Publication 560 - "sole proprietors and partners deduct contributions for themselves on line 28 of 1040"

[tpac]

Publication 560 - "sole proprietors and partners deduct contributions for themselves on line 28 of 1040"

Full text is "Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., you receive from the partnership.)"

[dandarc]

Line 18 instructions for form 1065:

Do not deduct payments for partners to
retirement or deferred compensation plans
including IRAs, qualified plans, and
simplified employee pension (SEP) and
SIMPLE IRA plans on this line. These
amounts are reported on Schedule K-1,
box 13, using code R, and are deducted by
the partners on their own returns.

[tpac]

Line 18 instructions for form 1065:

Do not deduct payments for partners to
retirement or deferred compensation plans
including IRAs, qualified plans, and
simplified employee pension (SEP) and
SIMPLE IRA plans on this line. These
amounts are reported on Schedule K-1,
box 13, using code R, and are deducted by
the partners on their own returns.

Yeehaw! Now that I know that it's possible to list the deduction on the K1 (box 13) without reducing the ordinary business income (box 1) it all makes sense!

[dandarc]

Right - so you may want to change to S-Corp for future years, but that comes with some overhead too, so consider carefully.

Now you got me thinking.  In the past, income has been just enough over the SS max that I'd only save on medicare for this type of move, or at least the vast majority would be only medicare.  Combine with my middle-man telling me something to the effect of "if you incorporate, then we're doing corp-to-corp, which is a different kind of deal", and I decided "eh, not worth the hassle".  But I'm working less now, so there's more tax to be saved . . . maybe worth the hassle.