How to Complete a Solo 401k Profit Sharing Calculation

A Solo 401(k) plan is a retirement savings tool for self-employed individuals and small business owners without employees. This structure allows for contributions from two perspectives: as an “employee” through elective deferrals and as an “employer” through profit sharing contributions. The employer profit sharing contribution requires a specific calculation based on your business’s income and structure.

Understanding Solo 401k Contribution Components

A Solo 401(k) permits contributions from the dual roles you hold. The first is the employee elective deferral, where you contribute as the employee of your own business. For 2025, the maximum employee contribution is $23,500, a set dollar figure determined annually by the IRS. These deferrals can be made on a pre-tax basis to reduce your current taxable income, or as a Roth contribution if your plan allows.

Individuals age 50 or over are eligible to make additional catch-up contributions. For 2025, the standard catch-up amount is $7,500, allowing a total employee contribution of $31,000. A higher catch-up contribution of $11,250 is permitted for individuals aged 60 to 63, increasing their total possible employee contribution to $34,750.

The second component is the employer profit sharing contribution, which is made from the business’s funds to your retirement account. Unlike the fixed-dollar employee deferral, this contribution is a percentage of your compensation. The specific percentage and the definition of compensation depend on how your business is legally structured. This contribution is also discretionary, meaning you can choose how much to contribute each year, from zero up to the maximum allowed.

Determining Your Plan Compensation

The foundation of the profit sharing calculation is “plan compensation,” which varies based on your business entity. For sole proprietors and single-member LLCs taxed as sole proprietorships, the calculation begins with your gross self-employment income. After subtracting all ordinary and necessary business expenses, you are left with your net profit, which is reported on Schedule C of your Form 1040.

From this net profit, you must calculate your self-employment tax using Schedule SE. The next step is to subtract one-half of your self-employment tax from your net profit. The final number after this subtraction is your “net adjusted self-employment income,” which serves as the basis for your profit sharing contribution.

The process is more direct for owners of S-Corporations and C-Corporations. For these entities, plan compensation is the W-2 wages you receive as an owner-employee. Other forms of income from the corporation, such as shareholder distributions or dividends, are not considered compensation for calculating retirement plan contributions. The W-2 wage must be considered “reasonable compensation” for the services you provide.

Calculating the Maximum Profit Sharing Contribution

Once you have determined your plan compensation, you apply the correct percentage to calculate your maximum profit sharing contribution. For sole proprietors and partnerships, the employer contribution is limited to 20% of your net adjusted self-employment income.

For S-Corporations and C-Corporations, the maximum profit sharing contribution is 25% of your W-2 wages. The business makes this contribution on your behalf, and it is a deductible business expense for the corporation.

The sum of your employee elective deferrals and the employer profit sharing contribution cannot exceed a total annual cap. For 2025, this combined limit is $70,000. This overall limit is increased by any catch-up contributions. With the standard $7,500 catch-up, the total limit becomes $77,500, and for those aged 60 to 63 who make the higher $11,250 catch-up, the limit increases to $81,250.

Consider a sole proprietor under age 50 with $100,000 in net profit. After calculating self-employment tax (approximately $14,130), they subtract one-half ($7,065) to find a net adjusted self-employment income of $92,935. Their maximum profit sharing contribution is 20% of this amount, or $18,587. If they also made the maximum employee contribution of $23,500, their total contribution would be $42,087, which is under the $70,000 overall limit.

An S-Corporation owner under 50 who pays themselves a W-2 salary of $80,000 has a maximum profit sharing contribution of $20,000 (25% of wages). If this owner also contributes the maximum $23,500 as an employee, their total is $43,500, also below the overall cap. If their salary were $300,000, their potential profit sharing contribution would be limited by the cap; after their $23,500 employee contribution, the maximum profit sharing would be $46,500 ($70,000 – $23,500).

Contribution Deadlines and Procedures

The timing for funding your Solo 401(k) differs for the two contribution types. The employee elective deferral must be formally elected by the end of the business’s tax year, which is December 31 for most businesses. The actual deposit of these funds can often be made up until the business’s tax filing deadline.

The deadline for making the employer profit sharing contribution is up to the due date of the business’s federal income tax return, including extensions. For a sole proprietorship, this is the personal tax filing deadline of April 15, or October 15 with an extension. For corporations, the deadline is March 15, or September 15 with an extension.

To make contributions, you transfer funds from your business bank account into your Solo 401(k) account. It is important for record-keeping to clearly document the amounts designated as employee versus employer contributions. This substantiates your deductions, as the employer contribution is a business expense, while the employee contribution is a deferral of your compensation.