The Self-Directed Solo 401(k) allows for pretax contributions to be made two different ways: Salary Deferral and Profit-Sharing. Here is the 2020 contribution limit breakdown for each and how they are calculated.
Salary Deferral - With salary deferral, the account holder can contribute:
- 100% of net earnings from self-employment up to a maximum of $19,500.
- Those who are 50 years old or older qualify for the additional catch-up contribution of $6,500, bringing the salary deferral limit to $26,000.
Profit-Sharing - In addition to salary deferral, the account holder can also make a profit-sharing contribution:
- For those set up as an LLC, Partnership or Sole Proprietor, they can contribute up to 20 percent of their net earnings (**calculation below) from self-employment.
- Those set up as C-Corporations and S-Corporations can contribute up to 25 percent of their salary from self-employment.
Combined Limit - The contribution limit for the salary deferral and profit sharing, combined, cannot exceed $57,000 for those under 50 years old or $63,500 for those 50 years old and over. Again, this is the maximum amount allowed; the account holder doesn’t have to contribute the full amount.
Here are a few examples:
Example 1 – Stone is 40 years old, has an LLC and will make $100,000 in net earnings (after deductions and less ½ self-employment tax) from his one-person business in 2020.
Salary deferral calculation: 100 percent of net earnings ($100,000) not to exceed the $19,500 limit
Salary deferral amount: $19,500
Profit-sharing calculation: $100,000 * 20% (but not to exceed $57,000)
Profit-sharing amount: $20,000
Combined contribution calculation: $19,500 + $20,000 (but not to exceed $57,000) =
Combined contribution amount allowed: $39,500
*If Stone is 50 or over, add $6,500 to the salary deferral amount and overall contribution limit.
*If Stone’s company is taxed as an S-corp or C-corp, multiply $100,000 by 25%.
Example 2 – Stone is 40 years old, has an LLC and will make $300,000 in net earnings (after deductions and less ½ self-employment tax) from his one-person business in 2020.
Salary deferral calculation: 100 percent of net earnings ($300,000) not to exceed the $19,500 limit
Salary deferral amount: $19,500
Profit-sharing calculation: $300,000 * 20% (not to exceed $57,000)
Profit-sharing amount: $57,000
Combined contribution calculation: either $57,000 from profit-sharing only, or $19,500 salary deferral + $37,500 profit-sharing =
Combined contribution amount allowed: $57,000
*If Stone is 50 or over, add $6,500 to the salary deferral amount which makes the overall contribution limit $63,500.
*If Stone’s company is taxed as an S-corp or C-corp, multiply $300,000 by 25%, but the profit-sharing will still be capped at $57,000.
Example 3 – Stone is 40 years old, has an LLC and will make $15,000 in net earnings (after deductions and less ½ self-employment tax) from his one-person business in 2020.
Salary deferral calculation: 100 percent of net earnings ($15,000) not to exceed the $19,500 limit
Salary deferral amount: $15,000
Profit-sharing calculation: $15,000 * 20% (not to exceed $57,000)
Profit-sharing amount: $3,000
Combined contribution calculation: either $15,000 from salary deferral only, or $3,000 profit-sharing + $12,000 salary deferral =
Combined contribution amount allowed: $15,000 since Stone will be capped by the net earnings amount. He cannot contribute money that hasn’t been earned from self-employment.
*If Stone is 50 or over, the catch-up contribution cannot be added to the salary deferral amount because he is capped by his net earnings amount.
*If Stone’s company is taxed as an S-corp or C-corp, multiply $15,000 by 25%.
Additional Resources:
Please refer to our online calculator for assistance estimating the maximum contribution amount.
** Net earnings should be determined as follows:
Net profit (line 31 Schedule C)
Less: Deduction for one-half of self-employment tax (Line 6 on Schedule SE or Line 14 on Schedule 1)
Equals: Net earnings from self-employment
Additional information can be found in Publication 560 (2019), Retirement Plans for Small Business in this section: Rate Table for Self-Employed. Keep in mind, the contribution amounts listed in this publication represent 2019 limits.
Comments