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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 11834
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I have a question about my solo 401K plan. I own an s-corp

Customer Question

I have a question about my solo 401K plan. I own an s-corp and am the only owner/employee. In 2016, I had a total salary of $23,500.
Here are the contributions:
- $18,000 was an employee contribution to the solo 401k plan.
- $5,500 was an employer contribution to the solo 401k plan.
Here’s how they were deducted:
The $18,000 was deducted on Box 12 of my W-2.
The $5,500 was deducted on 1120s Line 17.
Here’s the problem:
The $5,500 is showing up on 1040 Line 7. If this amount was already contributed to my plan, why would I pay income tax on it? The tax software is pulling this from my W2.
Here’s what the boxes in my W2 looks like:
1. $5,500
3. $23,500
5. $23,500
12. $18,000
Again, why would I pay tax on the $5,500 if its going to my solo 401k plan. This should not be showing up on my 1040, correct? Was my W-2 filled out incorrectly? I’m not sure what’s causing this. Please advise?
Submitted: 2 months ago.
Category: Tax
Expert:  Lane replied 2 months ago.

The way you can tell that there was a salary deferral (the 18000 here) is that the salary deferral won't be in box 1... but because a salary deferral into a 401(k) is still taxed for Social Security and Medicare purposes, the full salary will be in boxes 3 and 5.

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Box 12 is just informational

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What the W-2 is showing you is a salary of 23500 and an 18000 deferral into the plan.

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23500 - 18000 = 5500

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What should be on line 17 of the 1120-S is the PROFIT SHARING component of the contribution to the 401(k) ... For those that want to contribute more than the max 18000 salary deferral.

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The maximum that can be contributed for someone with a salary of 23500 as a profit sharing contribution would be 5875 (25% of 23500)

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For shareholder employees of S and C corps, the basis for both the salary deferral and the profit sharing contribution is w-2 wages.

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The 5500 you see there is showing that 18000 of your 23500 salary left you with only 5500 of TAXABLE income.

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And the P/S component should be on line 17. If the amount you contributed over the 18000 WAS, coincidentally, 5500, then you'll get the tax benefit of THAT by lowering the profit allocated to you on the k-1.

Expert:  Lane replied 2 months ago.

Please let me know if you have ANY questions at all, before rating me.

I hope you’ll rate me (using those stars, or faces on your screen, by clicking submit) based on thoroughness and accuracy, rather than any good news / bad news content.

Otherwise I’ll receive no compensation for the work here at all, from JustAnswer.

Thank you!

Lane

I hold a law degree, with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, to clients on three continents since 1986

Customer: replied 2 months ago.
Thanks for the reply but it didn’t really answer my question…Why is the $5,500 still showing up as salary on form 1040 Line 7?This was the employer contribution to the solo 401k.If this amount was contributed to my solo 401k, why would I pay tax on it?Again, this is showing up as salary on form 1040 Line 7. And is also in box 1 of the W-2.
Expert:  Lane replied 2 months ago.

You don't understand.

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What appears in box 1 is the salary minus the Salary deferral (23500 - 18000), the taxable salary AFTER removing the 18000.

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The EMPLOYER contribution (the profit sharing component, the amount OVER 18000) goes on line 17 and reduces the taxable profit flowing to you on the K-1

Customer: replied 2 months ago.
I completely understand. But, here’s my concern.The employer contribution ($5500) was deducting on line 17 so it reduced by K-1 by $5500.However, it showed right back up again on 1040 line 7 as salary ($5500).So in the end, I didn’t really get a reduction, correct?It reduced my K-1 by $5500 but then it increased my 1040 by $5500 as well. In the end, I am paying income tax on $5500 that was contributed to my solo 401k.My point is, I should have to pay NO income tax on the $5500 at all (aside from the medicare/SS).Do you understand my logic above?(On a side note, could it be possible that my W-2 was done incorrectly? Maybe box 1 should be $0?)
Expert:  Lane replied 2 months ago.

Box 1 would be zero if your salary was 18000.

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But box 3 and 5 are telling us that the salary was 23500.

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So either we have a coincidence (the remaining taxable salary and the profit sharing contribution by the S-Corp happened to be the same number) or something's wrong with the W-2.

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What's your salary?

Customer: replied 2 months ago.
My salary is $23,500. I want all of it to go to my solo 401k.$18,000 from employee and $5,500 from employer.My MAIN concern is that the $5,500 portion is being taxed incorrectly. Its showing up on 1040 line 7, which means I’m paying income tax on it.I should NOT be paying tax on this because it is a contribution to my solo 401k. The whole point of contributing this to my solo 401K is so that I do NOT have to pay tax on it.You are correct that it does come off line 17 on 1120s. However, it shows right back up on the 1040. So deducting it from the 1120s has no value if it shows right back up on the 1040. At the end of the day, I’m being taxed on $5,500 when I shouldn’t be.Do you have an answer for specifically this issue?
Expert:  Lane replied 2 months ago.

I'm sorry, but that's not how this works.

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What you're missing is that the salary deferral limit is 18000.

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You'll see that from IRS here: https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit

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If you paid yourself 23500, then that leaves 5500 to be taxed.

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The 5500 on line 17 is an additional contribution over and above your salary deferral. (401(k)'s allow for both a salary deferral and a profit sharing ... but again, the salary deferral limit is 18000)

Expert:  Lane replied 2 months ago.

You see that in the actual tax code here: https://www.law.cornell.edu/uscode/text/26/401 and then the dollar amount is here: 26 U.S. Code § 402 - Taxability of beneficiary of employees’ trust

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What you'll see there is actually 15000, but IRS is tasked with indexing that amount for inflation. For 2016 AND 2017 the deferral limit as 18000 and the profit Sharing limit is 25% of wages.

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(for both S-Corp and C-Corp shareholder/employees)

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It's different for self-employed ( a very specific tax term of art meaning LLC's members not taxed as a corporation, partners, and sole proprietors)

Expert:  Lane replied 2 months ago.

Let me know if you have and other questions, at all.

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I hope you’ll rate me (using those stars, or faces on your screen, by clicking submit) based on thoroughness and accuracy, rather than any good news / bad news content.

...

Lane