Do Self-Employed “Employer” 401k Contributions Reduce SE Tax?

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Kookaburra
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Do Self-Employed “Employer” 401k Contributions Reduce SE Tax?

Post by Kookaburra »

For W2 employees, employER contributions to a 401k (e.g., matches, profit sharing contributions, etc.) are not subject to social security (6.2%) or Medicare tax (1.45%). Whereas income that is electively deferred by the employEE is still subject to these taxes.

By comparison, it would then seem that “employer” contributions to a self-employed person’s 401k should similarly reduce SE earnings so as to avoid SS/Medicare tax. Is this the case?
aristotelian
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Re: Do Self-Employed “Employer” 401k Contributions Reduce SE Tax?

Post by aristotelian »

I'm pretty sure it does not. I don't see anywhere on Schedule C where Solo 401k contributions (employee or employer) reduce net profit, and I don't see anywhere on Schedule SE where they would reduce SE tax calculation.
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Eagle33
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Re: Do Self-Employed “Employer” 401k Contributions Reduce SE Tax?

Post by Eagle33 »

The deduction is found on Schedule 1 Part II - Deductible part of self-employment tax.
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Ben B
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Re: Do Self-Employed “Employer” 401k Contributions Reduce SE Tax?

Post by Ben B »

AFAIK the EmployER contribution is considered a business expense or "employee benefit" and as such should reduce your net profit. So no SE tax on it

Edit: to clarify, I'm referring to an S-Corp. In this case your EmployeE contributions are deducted from payroll, but you still pay full SE taxes on them.

However the employeR portion, doesn't flow through payroll, so even though it ends up in your 401k account, it is not subject to SE taxes

Hence the EmployeR portion doesn't "reduce" SE earnings per se, but if you have limited funds to contribute, it would seem beneficial to first maximize the EmployeR bucket, as that allows funds to flow into your 401k without paying SE taxes
Last edited by Ben B on Tue Jan 12, 2021 10:39 pm, edited 6 times in total.
Soon2BXProgrammer
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Re: Do Self-Employed “Employer” 401k Contributions Reduce SE Tax?

Post by Soon2BXProgrammer »

Ben B wrote: Tue Jan 12, 2021 9:59 pm AFAIK the EmployER contribution is considered a business expense or "employee benefit" and as such should reduce your net profit. So no SE tax on it
I am only familiar with Schedule C and this is not true for Schedule C. (for S CORP, ask an accountant)
DSInvestor
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Re: Do Self-Employed “Employer” 401k Contributions Reduce SE Tax?

Post by DSInvestor »

For S-Corp, the social security and medicare payroll taxes are determined by the amount of your S-Corp W-2 Salary Solo 401k employer contributions do not reduce the payroll taxes. Solo 401k employer contributions are an expense of the S-Corp and reduce the net income of the S-Corp.
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Spirit Rider
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Re: Do Self-Employed “Employer” 401k Contributions Reduce SE Tax?

Post by Spirit Rider »

Ben B wrote: Tue Jan 12, 2021 9:59 pm AFAIK the EmployER contribution is considered a business expense or "employee benefit" and as such should reduce your net profit. So no SE tax on it
While this is true in a figurative sense, it is not true for a self-employed individual in the technical sense. A self-employed individual and the business are one in the same. Therefore, a self-employed individual's employer contributions are in fact a personal expense and not a business expense.

Schedule C instructions are very clear for Line 19 Pension and profit-sharing plans. Only W-2 employee employer contributions are a business expense that reduces business profit and thus SE taxes.

Line 19
Enter your deduction for the contributions you made for the benefit of your employees to a pension, profit-sharing, or annuity plan (including SEP, SIMPLE, and SARSEP plans described in Pub. 560). If the plan included you as a self employed person, enter the contributions made as an employer on your behalf on Schedule 1 (Form 1040 or 1040-SR), line 15, or Form 1040NR, line 28, not on Schedule C.

A self-employed individual most definitely pays SE taxes on employer contributions.
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