November 21, 2021 at 5:06 pm #71513
I am a new independent contractor with no employees and have significant 1099 income for 2021. I recently found out I can open a solo 401K with an employee contribution of up to $19.5K plus an employee catch-up contribution of up to $6.5K plus an employer profit sharing contribution of up to $38.5K (must be less than 20% of net income) for a total of up to $64.5K.
I spoke to both Vanguard Group and Fidelity Investments small business groups about the logistics. I have significant accounts with both vendors. Vanguard says to open the retirement plan I need a Federal EIN by 12/31/21, but Fidelity says I do not need an EIN. Vanguard says if I open the solo 401K by 12/31 that I do not need to make employee or employer contributions until 4/15/22, but if I open it in 2022, I can only make employer contributions for 2021. Fidelity says I must open the plan by 12/31/21 and need to make employee contribution by 12/31/21 and employer contributions by 4/15/22. I don’t know whom to believe.
Vanguard also warned me about possible tax consequences of getting an EIN even if I don’t use it (typical Vanguard FUD). I have reviewed the MN small business tax site and it seems to indicate I do not have to worry about getting a state EIN or registering for state unemployment or any sales/use tax because I am not buying/selling anything.
I self-prepare my taxes for many years with H&R Block Deluxe software. It does not appear to support these deductions. I do not know whether HRB Premium or HRB Premium+Business will allow me to deduct both employee and employer solo 401K contributions.
1) Do I need an EIN?
2) What are the contribution deadlines?
3) What HRB software version supports solo 401K? Which line on which form contains the solo 401K employee contribution and which line contains the employer contribution?November 21, 2021 at 10:43 pm #71516Kaye ThomasModerator
Congratulations on having the kind of income that raises these questions.
[Edited to remove an incorrect comment.]
Ordinarily you don’t need an EIN for a sole proprietorship with no employees, but you do need one to establish a solo 401k. It may be possible to get started with “EIN pending,” which may be why you heard from Fidelity that you don’t need one to start the plan. But that procedure is a holdover from the days when it could take days or weeks to get an EIN through the mail. Nowadays you can quickly and easily get one online:
Your “employee contribution” will be deductible in the year made. If you wait until after the end of the year to contribute, it will be a 2022 contribution, and you’ll have lost the opportunity to contribute for 2021. The information you received from Vanguard was incorrect.
Your “employer contribution” for 2021 can be made in 2022 by the due date of your 2021 return, but only if the plan has been established by the end of 2021.
I don’t know which version of HRB software works for this. I think all the major tax software firms require a much more expensive version when dealing with a sole proprietorship, with limited exceptions designed to attract relatively low-income gig workers.
November 22, 2021 at 12:26 am #71518
- This reply was modified 10 months ago by Kaye Thomas.
Thanks for the prompt response Kaye. Please help me understand the difference between your definition of the 2021 deferral limit and that described on the following IRS web page. It appears to indicate the $58K limit for 2021 does *not* include the catch-up contribution:
“Contribution limits in a one-participant 401(k) plan
The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:
• Elective deferrals up to 100% of compensation (“earned income” in
the case of a self-employed individual) up to the annual contribution limit:
o $20,500 in 2022 ($19,500 in 2020 and 2021), or $27,000 in 2022
($26,000 in 2020 and 2021) if age 50 or over; plus
• Employer nonelective contributions up to:
o 25% of compensation as defined by the plan, or
o for self-employed individuals, see discussion below . . .
Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $61,000 for 2022 ($57,000 for 2020; $58,000 for 2021).“November 22, 2021 at 2:11 am #71521Kaye ThomasModerator
I’m glad one of us was alert enough to see the correct information. I’ve edited my original response to remove the error, just in case someone saw it and failed to read further in this thread to see the correction.November 22, 2021 at 11:02 pm #71601ruthParticipant
The HRB Deluxe program will handle a solo 401(k). See the Keogh/SEP/SIMPLE contributions worksheet. The total from the worksheet is carried to Schedule 1 (Form 1040).November 27, 2021 at 2:27 am #71843
Thanks Ruth. I tested with 2020 HRB Deluxe and it will even help one calculate the contribution limits based on one’s age and income if one selects “yes help figure my deduction”. I was initially confused by the title of the worksheet but the interview questions reference individual 401K AKA solo 401K.
The key thing is to enter the employee contribution when it asks for “elective deferrals” and the grand total (employee + catch-up + employer profit sharing) when it asks for “actual contribution”.
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