Profit Sharing Contribution for Single-Member LLC

Submitted by John Going on Wed, 2023-03-29 00:11

New client for me – He filed a return and claimed an adjustment to income for a $27K contribution to a solo 401K. His Schedule C net income (single-member LLC) is $240,283. From my reading, he can make a profit-sharing contribution of 20% of his Schedule C net, or $48,056. Can he make an additional $21K contribution for 2022 and I amend the return since we have not reached April 15th?

Also, in this context is it important for an owner to call a portion of the contribution an “elective deferral”, or since they are a single-member LLC, can the whole contribution be profit-sharing? I “think” elective deferral is important when you have an employee making contributions and the employer is matching, but in this case it is just the owner and no employees.



Submitted by William Tuttle on Wed, 2023-03-29 06:32

  • A self-employed individual’s net earnings from self-employment (self-employed earned income) = business profit – 1/2 SE tax = $240,283 – $12,332 – $227,951
  • A self-employed individual is both employee and employer. They can make neither, either or both types of contributions.
  • There is a single employee deferral limit (2022 = $20,500 + $6,500 catch-up >= age 50), 2023 = $22,500 + $7,500 catch-up >= age 50) for all 401k, 403b and SIMPLE IRA plans.
  • A self-employed individual has until their tax filing deadline including extensions to make employee deferrals.
  • However, a written employee deferral election must be completed by 12/31.
  • The maximum self-employed employer contribution = 20% of self-employed earned income $227,951 = $45,590.
  • There is also an (employee + employer contribution) annual addition limit (2022 = $61,000, 2023 = $66,000) for each unaffiliated employer. Note: Catch-up contributions are not included in the annual addition limit.
  • If the client had made an employee deferral election by 12/31/22. He could have made an employee deferral of $20,500 (+$6,500 catch-up >= age 50) + an employer contribution of ($61,000 – $20,500 = $40,500*) for a total of $61,000 ($67,500 >= age 50).
  • If not the client can make an employer contribution of $45,590.
  • The client has until 4/18/23 to make the contributions** and 10/16/33 to amend the return.

 

  • *Even though the calculated maximum employer contribution = $45,590. It is reduced to $40,500 by the annual addition limit. Although, the choice could be made to reduce the employee deferral instead.
  • **Because the client already timely filed the return and can not now request an extension.

Submitted by John Going on Wed, 2023-03-29 15:01

Thank you for the detailed response, Spiritrider. In the 5th bullet point you note:

  • However, a written employee deferral election must be completed by 12/31.”

The client will ask me what this means.  My interpretation of your comment is that the client needed to have either taken the deferral by 12/31 or submitted a written election noting the amount of elective deferral that would be taken by the due date. Is my understanding correct?

Submitted by William Tuttle on Wed, 2023-03-29 20:54

An employee deferral election is required by 12/31, regardless of whether the actual deferral is before or after this date.

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