Officer Compensation with Solo 401k Plan Deferral
By Jason Watson, CPA
Posted February 22, 2020
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.
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