How to calculate, and record, your solo 401(k) contribution deduction on your 2020 tax return.

Updated: Apr 23

Here is calculation and recording guidance from IRS Publication 560, updated for 2020, for people who are contributing to their self directed solo 401(k) for 2020.

Learn more about adopting and contributing to a self directed solo 401k on this site.

As stated in the Publication:

6. Table and Worksheets for the Self-Employed

As discussed in chapters 2 and 4, if you are self-employed, you must use the rate table or rate worksheet and deduction worksheet to figure your deduction for contributions you made for yourself to a SEP-IRA or qualified plan.

First, use either the rate table or rate worksheet to find your reduced contribution rate. Then, complete the deduction worksheet to figure your deduction for contributions.


CAUTION! The table and the worksheets in chapter 6 apply only to self-employed individuals who have only one defined contribution plan, such as a profit-sharing plan. A SEP plan is treated as a profit-sharing plan. However, don't use this worksheet for SARSEPs.


Rate Table for Self-Employed. If your plan's contribution rate is a whole percentage (for example, 12% rather than 12½%), you can use the Rate Table for Self-Employed on the next page to find your reduced contribution rate. Otherwise, use the Rate Worksheet for Self-Employed provided below. First, find your plan contribution rate (the contribution rate stated in your plan) in Column A of the table. Then, read across to the rate under Column B. Enter the rate from Column B in step 4 of the Deduction Worksheet for Self-Employed on this page. Example. You are a sole proprietor with no employees. If your plan's contribution rate is 10% of a participant's compensation, your rate is 0.090909. Enter this rate in step 4 of the Deduction Worksheet for Self-Employed on this page.


Rate Worksheet for Self-Employed. If your plan's contribution rate isn't a whole percentage (for example, 10½%), you can't use the Rate Table for Self-Employed. Use the following worksheet instead. Rate Worksheet for Self-Employed 1)Plan contribution rate as a decimal (for example, 10½% = 0.105) _____

2)Rate in line 1 plus 1 (for example, 0.105 + 1 = 1.105) _____

3)Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2) (for example, 0.105 ÷ 1.105 = 0.095) Figuring your deduction. Now that you have your self-employed rate from either the rate table or rate worksheet, you can figure your maximum deduction for contributions for yourself by completing the Deduction Worksheet for Self-Employed.


Community property laws. If you reside in a community property state and you are married and filing a separate return, disregard community property laws for step 1 of the Deduction Worksheet for Self-Employed. Enter on step 1 the total net profit you actually earned.


Example.

You are a sole proprietor with no employees. The terms of your plan provide that you contribute 8½% (0.085) of your compensation to your plan. Your net profit from Schedule C (Form 1040), line 31, is $200,000. You have no elective deferrals or catch-up contributions. Your self-employment tax deduction on line 14 of Schedule 1 (Form 1040) is $11,216. See the filled-in portions of both Schedule SE (Form 1040), Self-Employment Income, and Form 1040, later. You figure your self-employed rate and maximum deduction for employer contributions you made for yourself as follows.


Caveat from Whitney Nash: While Solo 401(k)s are defined contribution plans that do allow for elective salary-deferrals, this example provided by Publication 560 does not include the (up to) $19,500 or $26,000 contribution on Step 9 and Step 17. This example is as if the plan is a SEP IRA.


If including the salary-deferral in your deductions, add it to Step 9, and if the catch-up contribution applies, add that portion of the salary deferral to Step 17, then proceed by following the calculation directions.

See the filled-in Deduction Worksheet for Self-Employed on this page.

Rate Worksheet for Self-Employed 1)Plan contribution rate as a decimal (for example, 10½% = 0.105) 0.085

2)Rate in line 1 plus 1 (for example, 0.105 + 1 = 1.105) 1.085

3)Self-employed rate as a decimal rounded to at least 3 decimal places (line 1 ÷ line 2)

(for example, 0.105 ÷ 1.105 = 0.095) 0.078


Portion of Form 1040 and Portion of Schedule SE


Source: Publication 560 (2020), Retirement Plans for Small Business | Internal Revenue Service (irs.gov)



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