Officer Compensation with Solo 401k Plan Deferral
Posted November 23, 2018
Previously we showed you a mock-up of a W-2 with self-employed health insurance premiums added to Box 1 as Wages. When you have a solo 401k plan and make employee (you) deferrals, that reduces Box 1 of your W-2. However, Line 7 of the corporate tax return will still show the gross salary paid plus self-employed health insurance premiums as Officer Compensation.
In other words, contributing to a 401k plan does not reduce your Officer Compensation below a level where the IRS might challenge your reasonable salary determination. If you worked for Google making $100,000, and Google collects $18,000 and sends it off to the 401k people on your behalf, Google’s wage expense remains at $100,000. Same thing here.
Let’s geek out with a journal entry assuming $50,000 reasonable salary calculation with a $10,000 self-employed health insurance premium and an $19,000 employee pre-tax deferral-
|DR Shareholder Wage Expense||40,000|
|DR Self-Employed Health Ins.||10,000|
|DR Payroll Taxes||3,060||(7.65% of $40,000)|
|CR 401k Liability||19,000|
Line 7 Officer Compensation would read $50,000, but Box 1 of your W-2 would read $50,000 less $19,000 for 401k or $31,000. Your adjusted gross income on your individual tax return would be $31,000 less $10,000 for health insurance or $21,500…. Yes, we would have K-1 income of some mystery number. But you get the idea.
We will give you more examples including a table showing how this shakes out in our chapter on S Corp salaries.
Taxpayer’s Comprehensive Guide to LLCs and S Corps : 2019 Edition
This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-