Excess contribution to self-employed 401k

[Spelunker]

I have scoured the boards for this answer but I think I've put myself in a unique situation by trying to fix a mistake that actually wasn't a mistake. Here is my situation:

1. Started a new job in 2022 which came with a signing bonus paid as 1099 income

2. Opened a solo 401k at Vanguard and put in $20,500 employee contribution for 2022

3. In February I had not received a 1099 from my employer and then I misinterpreted my contract and thought that signing bonus would be "forgiven" in 2023 and thus I wasn't going to receive a 1099 for 2022. I therefore filed for removal of excess funds because I thought that the income did not qualify. Vanguard has now returned the $20,500 plus attributable earnings to me.

4. I subsequently received my 1099 for 2022 . I now realize that my contributions was actually ok in the first place.

Here is my question: Can I re-contribute the 2022 employee contribution of $20,500 now that the money has been returned to me? Or would this just be a tax nightmare? I am unclear on whether this is allowed and how I would report this on my taxes if it is.

Thank you in advance!

[PaddyMac]

I don't see why not. As a self-employed individual you are entitled to contribute for 2022 into a 401k up until your tax filing deadline of April 15 or October 15 if you file an extension.

Worse case you may get a polite letter from the IRS asking "WTF?" but then you can explain.

By the way, whether or not you got a 1099 from your employer should not have mattered. It was taxable income in 2022 because you received it then, and you would have had to report it as such. Hence, you could use that earned income for your 401k..

[SuzBanyan]

I have to ask: is a signing bonus from your current employer really self-employment income? And did you not defer any amount to that employer’s 401k after you started working there or to a prior employer’s 401k? Any employee deferral to a Solo 401k would be reduced by amounts deferred to other 401ks for that FP tax year.

[Spelunker]

I don't see why not. As a self-employed individual you are entitled to contribute for 2022 into a 401k up until your tax filing deadline of April 15 or October 15 if you file an extension.

Worse case you may get a polite letter from the IRS asking "WTF?" but then you can explain.

By the way, whether or not you got a 1099 from your employer should not have mattered. It was taxable income in 2022 because you received it then, and you would have had to report it as such. Hence, you could use that earned income for your 401k..

Sound reasonable and was along the lines of what I was thinking. Thank you for the clarification!

[Spelunker]

I have to ask: is a signing bonus from your current employer really self-employment income? And did you not defer any amount to that employer’s 401k after you started working there or to a prior employer’s 401k? Any employee deferral to a Solo 401k would be reduced by amounts deferred to other 401ks for that FP tax year.

I think so? From everything I've read on this forum and others, if it is paid out as a 1099-MISC it is considered earned income and I will have to pay self-employment tax on it. So I think I should be eligible to contribute to a 401k. If you (or anybody else!) disagrees I would love to hear why.

My previous employer only offered a 457b and my current employer does not allow me to contribute to the company 401k for the first year so I don't have any other employee deferrals.

[MP123]

I have to ask: is a signing bonus from your current employer really self-employment income? And did you not defer any amount to that employer’s 401k after you started working there or to a prior employer’s 401k? Any employee deferral to a Solo 401k would be reduced by amounts deferred to other 401ks for that FP tax year.

I think so? From everything I've read on this forum and others, if it is paid out as a 1099-MISC it is considered earned income and I will have to pay self-employment tax on it. So I think I should be eligible to contribute to a 401k. If you (or anybody else!) disagrees I would love to hear why.

My previous employer only offered a 457b and my current employer does not allow me to contribute to the company 401k for the first year so I don't have any other employee deferrals.

1099-MISC is for payments that are not compensation and not subject to self-employment tax. Generally it wouldn't be reported on Sch C. Some businesses may be reporting here incorrectly from before 1099-NEC was introduced.

1099-NEC is for non-employee compensation, it would be reported on Sch C, and qualify for 401k contributions, if you were an independent contractor.

But, the real question here is why your employer didn't report this bonus on W2? It seems to me that's where it would belong.

[peteyboy]

If its a 1099-MISC I'd be wary, to say the least. Without the details its hard to say but...

Since 2020 (year?) the 1099-NEC has generally been used for non-employee compensation (hence the NEC) as a way to distinguish earned income from non-earned income (1099-MISC). Earned income requires that payroll tax be paid (FICA and medicare). 1099-NEC is considered earned income. Solo 401k contributions, like all 401k contributions, have to be made with earned income.

1099-MISC includes income such as prize money, collected rent, etc. Couple links below on 1099-NEC vs 1099-MISC- I'm sure you will find other articles on line if you search.

https://www.mysolo401k.net/form-1099-ne ... ributions/

https://www.businessnewsdaily.com/payro ... s-1099-nec

I'd say setting up a solo 401k without having an active business is probably running afoul of the rules. And I'd say that making contributions to a solo 401k with 1099-MISC income that is not derived from business income (business associated with the solo 401k) is running afoul of the rules - especially if that business doesn't report any income.

When I report contributions to my solo 401k on my tax filings the business income (1099-NEC) goes on schedule 1, line 3. The deductible part of the self-employment tax goes on schedule 1, line 15. And the solo 401k contributions goes on schedule 1, line 16. Note that entering an amount on line 15 requires I attach a schedule SE, which I do. Also have to fill out a schedule C.

If you don't do all the above, entries on schedule 1, line 16 (and line 3) it may trigger a closer look at your submitted tax filing.

Unless you are confident in what you are doing and don't mind an audit....

Well, I wouldn't do what you are doing - it wouldn't be worth the potential hassle to me. To me you may have dodged a bullet by removal of that money. My two cents.

P.S. And don't forget, even if you have more than one 401k going - the max contribution in a year to all of them in aggregate in 2022 is only $20,500 so if you contributed to any 401k (or 403b) in 2022 you would be over the limit -assuming your plan is legit, which I highly doubt.

[PaddyMac]

1. Started a new job in 2022 which came with a signing bonus paid as 1099 income

When I replied to you above, based on your Subject, I assumed your new job was as a self-employed individual, since you had an Individual 401k retirement account. Are you receiving income from this employer as W-2 income?

And what type of 1099 did you get?

[Spelunker]

Thank you all for the thoughtful responses.

In an attempt to be brief I think I left out some important details so let me clarify a few things:

1. I am a salaried physician employed by a medical group as a W-2 employee

2. The signing bonus was actually paid by the hospital foundation and was reported on a 1099-MISC. It seems to me that the best way to categorize this payment would be "non-employee compensation" (as opposed to rent, prizes and awards, fishing boat proceeds, payments to an attorney, etc). Perhaps they should have sent a 1099-NEC instead? And shouldn't this income be subject to FICA taxes?

3. I am also a sole proprietor of a business (with an EIN) and I am eligible for payments made out by a third party (contracted by the hospital to manage the call pool) for call shifts taken at the hospital that go above the my contracted minimum. I happened to not exceed my minimum number of call shifts this last year so did not have any extra income from this source, but I do expect to have this as a source of self-employment income going forward.

I'm definitely not trying to run afoul of the IRS rules here but I don't really see a more appropriate way to report this income.

Thoughts?

[peteyboy]

Thank you all for the thoughtful responses.

In an attempt to be brief I think I left out some important details so let me clarify a few things:

1. I am a salaried physician employed by a medical group as a W-2 employee

2. The signing bonus was actually paid by the hospital foundation and was reported on a 1099-MISC. It seems to me that the best way to categorize this payment would be "non-employee compensation" (as opposed to rent, prizes and awards, fishing boat proceeds, payments to an attorney, etc). Perhaps they should have sent a 1099-NEC instead? And shouldn't this income be subject to FICA taxes?

3. I am also a sole proprietor of a business (with an EIN) and I am eligible for payments made out by a third party (contracted by the hospital to manage the call pool) for call shifts taken at the hospital that go above the my contracted minimum. I happened to not exceed my minimum number of call shifts this last year so did not have any extra income from this source, but I do expect to have this as a source of self-employment income going forward.

I'm definitely not trying to run afoul of the IRS rules here but I don't really see a more appropriate way to report this income.

Thoughts?

I wouldn't do it for several reason, and you'll wish you hadn't done it either when you get audited.

[MP123]

2. The signing bonus was actually paid by the hospital foundation and was reported on a 1099-MISC. It seems to me that the best way to categorize this payment would be "non-employee compensation" (as opposed to rent, prizes and awards, fishing boat proceeds, payments to an attorney, etc). Perhaps they should have sent a 1099-NEC instead? And shouldn't this income be subject to FICA taxes?

Yes, it doesn't sound like 1099-MISC is correct in this case.

See:
https://www.irs.gov/instructions/i1099m ... 1000276561

Do not include wages, any bonuses, prizes, and awards paid to your employees. Report these on Form W-2. Do not include in box 3 prizes and awards for services performed by nonemployees, such as an award for the top commission salesperson. Report them in box 1 of Form 1099-NEC.

It seems to me that this is compensation, but I'm not sure why it would be non-employee compensation. Doesn't this same employer pay you on W2?

But even if this compensation was reported incorrectly on 1099-MISC I think FICA taxes are still due either as self employment income or on W2. You may already be maxing out the SS portion, but the Medicare portion keeps going. So if you do report the 1099-MISC on Sch C and pay FICA you would be 401k eligible, this seems to be the "least wrong/most appropriate" approach vs the option of just reporting it as other income with no FICA or 401k.

I'm not sure why it wasn't put on W2 or 1099-NEC in the first place, but at least you'd be paying FICA and in the process you'd qualify for the soloK contribution.

[peteyboy]

2. The signing bonus was actually paid by the hospital foundation and was reported on a 1099-MISC. It seems to me that the best way to categorize this payment would be "non-employee compensation" (as opposed to rent, prizes and awards, fishing boat proceeds, payments to an attorney, etc). Perhaps they should have sent a 1099-NEC instead? And shouldn't this income be subject to FICA taxes?

Yes, it doesn't sound like 1099-MISC is correct in this case.

See:
https://www.irs.gov/instructions/i1099m ... 1000276561

Do not include wages, any bonuses, prizes, and awards paid to your employees. Report these on Form W-2. Do not include in box 3 prizes and awards for services performed by nonemployees, such as an award for the top commission salesperson. Report them in box 1 of Form 1099-NEC.

It seems to me that this is compensation, but I'm not sure why it would be non-employee compensation. Doesn't this same employer pay you on W2?

But even if this compensation was reported incorrectly on 1099-MISC I think FICA taxes are still due either as self employment income or on W2. You may already be maxing out the SS portion, but the Medicare portion keeps going. So if you do report the 1099-MISC on Sch C and pay FICA you would be 401k eligible, this seems to be the "least wrong/most appropriate" approach vs the option of just reporting it as other income with no FICA or 401k.

I'm not sure why it wasn't put on W2 or 1099-NEC in the first place, but at least you'd be paying FICA and in the process you'd qualify for the soloK contribution.

The OP said that the "signing bonus" was provided by a hospital foundation, not the employer. The way I see it is that's reportable income alright, but not earned income. Secondly, that "signing bonus" doesn't appear to have been paid to the OP's sole proprietorship for services rendered. And it sounds like the sole proprietorship has no income for the 2022 year. So, it's hard for me to understand how non-earned income could be used for contributions to a s401k for a business that didn't earn any income. Just sayin'.

[MP123]

2. The signing bonus was actually paid by the hospital foundation and was reported on a 1099-MISC. It seems to me that the best way to categorize this payment would be "non-employee compensation" (as opposed to rent, prizes and awards, fishing boat proceeds, payments to an attorney, etc). Perhaps they should have sent a 1099-NEC instead? And shouldn't this income be subject to FICA taxes?

Yes, it doesn't sound like 1099-MISC is correct in this case.

See:
https://www.irs.gov/instructions/i1099m ... 1000276561

Do not include wages, any bonuses, prizes, and awards paid to your employees. Report these on Form W-2. Do not include in box 3 prizes and awards for services performed by nonemployees, such as an award for the top commission salesperson. Report them in box 1 of Form 1099-NEC.

It seems to me that this is compensation, but I'm not sure why it would be non-employee compensation. Doesn't this same employer pay you on W2?

But even if this compensation was reported incorrectly on 1099-MISC I think FICA taxes are still due either as self employment income or on W2. You may already be maxing out the SS portion, but the Medicare portion keeps going. So if you do report the 1099-MISC on Sch C and pay FICA you would be 401k eligible, this seems to be the "least wrong/most appropriate" approach vs the option of just reporting it as other income with no FICA or 401k.

I'm not sure why it wasn't put on W2 or 1099-NEC in the first place, but at least you'd be paying FICA and in the process you'd qualify for the soloK contribution.

The OP said that the "signing bonus" was provided by a hospital foundation, not the employer. The way I see it is that's reportable income alright, but not earned income. Secondly, that "signing bonus" doesn't appear to have been paid to the OP's sole proprietorship for services rendered. And it sounds like the sole proprietorship has no income for the 2022 year. So, it's hard for me to understand how non-earned income could be used for contributions to a s401k for a business that didn't earn any income. Just sayin'.

Well personally, I don't see how a signing bonus could be anything but compensation/wages that would be reported on W2 subject to FICA and withholding. This would not qualify for a soloK contribution.

But, given the situation here, I'm not sure that's an option at this point.

See Rev Rule 2004-109:

https://www.irs.gov/pub/irs-drop/rr-04-109.pdf

Are you saying the bonus is not compensation?

[peteyboy]

2. The signing bonus was actually paid by the hospital foundation and was reported on a 1099-MISC. It seems to me that the best way to categorize this payment would be "non-employee compensation" (as opposed to rent, prizes and awards, fishing boat proceeds, payments to an attorney, etc). Perhaps they should have sent a 1099-NEC instead? And shouldn't this income be subject to FICA taxes?

Yes, it doesn't sound like 1099-MISC is correct in this case.

See:
https://www.irs.gov/instructions/i1099m ... 1000276561

Do not include wages, any bonuses, prizes, and awards paid to your employees. Report these on Form W-2. Do not include in box 3 prizes and awards for services performed by nonemployees, such as an award for the top commission salesperson. Report them in box 1 of Form 1099-NEC.

It seems to me that this is compensation, but I'm not sure why it would be non-employee compensation. Doesn't this same employer pay you on W2?

But even if this compensation was reported incorrectly on 1099-MISC I think FICA taxes are still due either as self employment income or on W2. You may already be maxing out the SS portion, but the Medicare portion keeps going. So if you do report the 1099-MISC on Sch C and pay FICA you would be 401k eligible, this seems to be the "least wrong/most appropriate" approach vs the option of just reporting it as other income with no FICA or 401k.

I'm not sure why it wasn't put on W2 or 1099-NEC in the first place, but at least you'd be paying FICA and in the process you'd qualify for the soloK contribution.

The OP said that the "signing bonus" was provided by a hospital foundation, not the employer. The way I see it is that's reportable income alright, but not earned income. Secondly, that "signing bonus" doesn't appear to have been paid to the OP's sole proprietorship for services rendered. And it sounds like the sole proprietorship has no income for the 2022 year. So, it's hard for me to understand how non-earned income could be used for contributions to a s401k for a business that didn't earn any income. Just sayin'.

Well personally, I don't see how a signing bonus could be anything but compensation/wages that would be reported on W2 subject to FICA and withholding. This would not qualify for a soloK contribution.

But, given the situation here, I'm not sure that's an option at this point.

See Rev Rule 2004-109:

https://www.irs.gov/pub/irs-drop/rr-04-109.pdf

Are you saying the bonus is not compensation?

I'm saying two things:

• First, it's income but not earned income (does not appear to be treated as such by the 1099-MISC issuer), nor does it appear to be associated in anyway with the sole proprietorship.

• Second, if no income is earned by the sole proprietorship (business) that established the s401k, then there is no money available for contributions by either the employee or employer to the s401k.

Pretty simple.

Excessive deferrals to a 401k can lead to disqualification of the plan and additional action by the IRS. Most sole proprietor s401k plans are established such that the plan administrator, the employer, and the employee are one and the same. Abusing and running afoul of the laws in this type of situation could potentially put that person in a tax fraud situation, and they won't be able to point the finger at someone else. Bottom line, it's not something to take lightly and ignorance is no excuse.

https://www.irs.gov/retirement-plans/co ... -401k-plan
https://www.irs.gov/retirement-plans/40 ... istributed

[Spelunker]

2. The signing bonus was actually paid by the hospital foundation and was reported on a 1099-MISC. It seems to me that the best way to categorize this payment would be "non-employee compensation" (as opposed to rent, prizes and awards, fishing boat proceeds, payments to an attorney, etc). Perhaps they should have sent a 1099-NEC instead? And shouldn't this income be subject to FICA taxes?

Yes, it doesn't sound like 1099-MISC is correct in this case.

See:
https://www.irs.gov/instructions/i1099m ... 1000276561

Do not include wages, any bonuses, prizes, and awards paid to your employees. Report these on Form W-2. Do not include in box 3 prizes and awards for services performed by nonemployees, such as an award for the top commission salesperson. Report them in box 1 of Form 1099-NEC.

It seems to me that this is compensation, but I'm not sure why it would be non-employee compensation. Doesn't this same employer pay you on W2?

But even if this compensation was reported incorrectly on 1099-MISC I think FICA taxes are still due either as self employment income or on W2. You may already be maxing out the SS portion, but the Medicare portion keeps going. So if you do report the 1099-MISC on Sch C and pay FICA you would be 401k eligible, this seems to be the "least wrong/most appropriate" approach vs the option of just reporting it as other income with no FICA or 401k.

I'm not sure why it wasn't put on W2 or 1099-NEC in the first place, but at least you'd be paying FICA and in the process you'd qualify for the soloK contribution.

The OP said that the "signing bonus" was provided by a hospital foundation, not the employer. The way I see it is that's reportable income alright, but not earned income. Secondly, that "signing bonus" doesn't appear to have been paid to the OP's sole proprietorship for services rendered. And it sounds like the sole proprietorship has no income for the 2022 year. So, it's hard for me to understand how non-earned income could be used for contributions to a s401k for a business that didn't earn any income. Just sayin'.

Well personally, I don't see how a signing bonus could be anything but compensation/wages that would be reported on W2 subject to FICA and withholding. This would not qualify for a soloK contribution.

But, given the situation here, I'm not sure that's an option at this point.

See Rev Rule 2004-109:

https://www.irs.gov/pub/irs-drop/rr-04-109.pdf

Are you saying the bonus is not compensation?

I'm saying two things:

• First, it's income but not earned income (does not appear to be treated as such by the 1099-MISC issuer), nor does it appear to be associated in anyway with the sole proprietorship.

• Second, if no income is earned by the sole proprietorship (business) that established the s401k, then there is no money available for contributions by either the employee or employer to the s401k.

Pretty simple.

Excessive deferrals to a 401k can lead to disqualification of the plan and additional action by the IRS. Most sole proprietor s401k plans are established such that the plan administrator, the employer, and the employee are one and the same. Abusing and running afoul of the laws in this type of situation could potentially put that person in a tax fraud situation, and they won't be able to point the finger at someone else. Bottom line, it's not something to take lightly and ignorance is no excuse.

https://www.irs.gov/retirement-plans/co ... -401k-plan
https://www.irs.gov/retirement-plans/40 ... istributed

Ok so what do you suggest I do? Would you just pay federal/state taxes on this income and forgo FICA taxes?

[peteyboy]

Yes, it doesn't sound like 1099-MISC is correct in this case.

See:
https://www.irs.gov/instructions/i1099m ... 1000276561



It seems to me that this is compensation, but I'm not sure why it would be non-employee compensation. Doesn't this same employer pay you on W2?

But even if this compensation was reported incorrectly on 1099-MISC I think FICA taxes are still due either as self employment income or on W2. You may already be maxing out the SS portion, but the Medicare portion keeps going. So if you do report the 1099-MISC on Sch C and pay FICA you would be 401k eligible, this seems to be the "least wrong/most appropriate" approach vs the option of just reporting it as other income with no FICA or 401k.

I'm not sure why it wasn't put on W2 or 1099-NEC in the first place, but at least you'd be paying FICA and in the process you'd qualify for the soloK contribution.

The OP said that the "signing bonus" was provided by a hospital foundation, not the employer. The way I see it is that's reportable income alright, but not earned income. Secondly, that "signing bonus" doesn't appear to have been paid to the OP's sole proprietorship for services rendered. And it sounds like the sole proprietorship has no income for the 2022 year. So, it's hard for me to understand how non-earned income could be used for contributions to a s401k for a business that didn't earn any income. Just sayin'.

Well personally, I don't see how a signing bonus could be anything but compensation/wages that would be reported on W2 subject to FICA and withholding. This would not qualify for a soloK contribution.

But, given the situation here, I'm not sure that's an option at this point.

See Rev Rule 2004-109:

https://www.irs.gov/pub/irs-drop/rr-04-109.pdf

Are you saying the bonus is not compensation?

I'm saying two things:

• First, it's income but not earned income (does not appear to be treated as such by the 1099-MISC issuer), nor does it appear to be associated in anyway with the sole proprietorship.

• Second, if no income is earned by the sole proprietorship (business) that established the s401k, then there is no money available for contributions by either the employee or employer to the s401k.

Pretty simple.

Excessive deferrals to a 401k can lead to disqualification of the plan and additional action by the IRS. Most sole proprietor s401k plans are established such that the plan administrator, the employer, and the employee are one and the same. Abusing and running afoul of the laws in this type of situation could potentially put that person in a tax fraud situation, and they won't be able to point the finger at someone else. Bottom line, it's not something to take lightly and ignorance is no excuse.

https://www.irs.gov/retirement-plans/co ... -401k-plan
https://www.irs.gov/retirement-plans/40 ... istributed

Ok so what do you suggest I do? Would you just pay federal/state taxes on this income and forgo FICA taxes?

Yes. And then take full f***ing advantage of that s401k when you can in 2023 and beyond!

In the grand scheme of things this $20.5K contribution should NOT make or brake your retirement plans. If you want, dump that after tax money onto BRKB and let it ride for a couple decades - no dividend so no tax until you sell. Then when you look back in 20-30 years, you’ll say to yourself “I should have bought more of that BRKB back then”. That sounds much better than dealing with an audit in 2024 or 2025 - to me anyway.