When Does Solo 401k Employee Contributions Need To Be Made for the Self Employed?
September 13th, 2011
One of the main advantages of adopting a Solo 401K Plan for the self-employed or small business owner with no employee is the ability to make high annual employee deferral contributions. For 2011, an individual under the age of 50 is entitled to make am annual employee deferral contribution of $16,500, whereas, an individual over the age of 50 is entitled to an annual $5500 catch-up contribution providing the individual with the opportunity to defer up to $22,000 annually. The employee deferral can be made in pre-tax or after-tax. The difference between a pre-tax and after-tax contribution, is that a pre-tax employee deferral contribution is tax-deductible when made but subject to tax when distributed after the age if 59 & 1/2. Whereas, an after-tax or Roth contribution is not tax deductible when make but the contribution and all appreciation is tax-free when distributed if the after-tax/Roth deferral has been made at least five years prior and the individual is over the age of 59 & 1/2 when the distribution is made.
In the case of a self-employed individual, the employee deferral contribution must be elected to be made prior to December 31 of the year. In other words, since an employee must have a deferral election in place before compensation is available, a self-employed person may not make a cash or deferred election with respect to compensation for a partnership or sole proprietorship taxable year after the last day of that year. Clearly, if the self-employed individual wants to make an employee deferral contribution and thus maximize their contributions, they can’t do so until their final compensation has been determined. This is permitted as long as the employee deferral contribution election was in place as of the last day of the taxable year. In other words, the self-employed individual or small business owner may defer against “advances” or “draws.” It is important to remember that at the end of the plan year, the employee deferral still must be tested as an annual addition for the Internal Revenue Code Section 415 limits. If the test fails then the excess amounts deferred would have to be corrected.
In addition, employer profit sharing contributions are not required to be made until the due date of the employer’s tax return, plus extensions. So, in the case of a sole proprietor, this is when the 1040 is due – October 15, if an extension was filed. Thus, in the case of a sole proprietor, the employee deferral must be elected prior to the end of the year, but the contribution can actually be made up until the individual’s tax return has been filed. While, in the case of an employer profit sharing contribution, the employer contribution can be made up until the self-employed individual files his or her income tax return.