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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29776
Experience:  Taxes, Immigration, Labor Relations
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Im trying to find the correct place to enter numbers related

Customer Question

I'm trying to find the correct place to enter numbers related to 401(k) of a sole proprietorship.
I have gross income of $11460 which after expenses becomes $5460 of business net profit from Schedule C. After computing my SE tax of $670 and employer-equivalent portion of SE of $385, that means my maximum deductible elective deferral is $5075. This goes to Line 28 on my 1040.
I am also entitled to make a 25% employer nonelective profit-sharing contribution of $1269.

Where does this go?
Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

LEV :

Hi and welcome to Just Answer!
Generally employer's contributions to retirement plan for the benefit of your employees are reported on schedule C, line 19. However - see instructions, page 6 - http://www.irs.gov/pub/irs-pdf/i1040sc.pdf
If
the plan included you as a self-employed person, enter contributions made as an employer on your behalf on Form 1040, line

28, or Form 1040NR, line 28, not on Schedule C.

LEV :

So you will report tehtotal amount on form 1040, line 28.

Customer :

The way I've understood what goes on line 28 cannot exceed $5075 because that maximum is my net profit minus my SE amount of $385.

Customer :

And I think that means if I am taking 100% of my elective deferral, I can never get any benefit of an employer nonelective contribution.I can never get the benefit of both

Customer :

Do you mean I should add $5075 plus $1269 and thus take a deduction of $6344 ?

Customer :

The link is where I started and the IRS indicates that I should be able to contribute both. But everything I read says the limit stops me from doing so. I'm even more confused now.

LEV :

You are still a self-employed person - you are not an employee of yourself.
You are able to contribute both portions and report teh total on 1040, line 28.
The contribution limit is determined separately.
I suggest this simple calculator to determine your limit - http://www.solo401kcalculator.com/

Customer :

yes, the calculator does what I had already understood. I can see how the maximums are computed. What worries me is adding two maximums together. If I enter 5075 plus 1269 or $6344 on 1040, line 28, isn't a big red flag going to go off because it is over the limit of $5075?

Customer :

Or do you mean that I should make the combined contribution but only deduct 5075?

LEV :

As long as your contribution is within allowed limitation - there is no red flag.
You need to deduct the total amount on line 28 form 1040.

LEV :

Please be sure to accept the answer. Experts are credited only if answers are accepted.
Let me kno wif you need any help with tax related issues.

Customer :

Both the IRS worksheets and the calculator you suggested tell me that the maximum I can enter on 1040, line 28 is 5075.

Customer :

Unless you can show me otherwise, I think that means the correct answer to my question is that I am not allowed to make any profit-sharing contribution because I elected to defer 100% and I am therefore not allowed to make any profit sharing contribution becasue there is already nothing left. All of the net profit has already been deducted as the total of the SE tax and the elective deferral amount.

LEV :

If your net self-employment income is $11460 - your maximum contribution into solo 401k plan is $10,657.15.

It doesn't matter how you treat that contribution - as a deferral contribution or as a profit sharing - your total contribution may not be more than your earnings determined as your net self-employment income is $11460 - $802.85 self-employment taxes attributable to employer's portion.
Because you are self-employed you have two portions to determine your maximum contribution - but there is no different treatment for these two portions - they are added and reported on line 28.