Search Knowledge Base by Keyword
Taxpayers Guide to LLCs and S Corps
Expat and Expatriate KB
Rental Property KB
Other Tax Information KB
Small Business KB
- Articles coming soon
Officer Compensation with Solo 401k Plan Deferral
By Jason Watson, CPA
Posted Sunday, July 11, 2021
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 $19,500 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 $19,500 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||19,500|
Line 7 Officer Compensation would read $50,000, but Box 1 of your W-2 would read $50,000 less $19,500 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. Super fun!
Taxpayer's Comprehensive Guide to LLCs and S Corps 2021-2022 Edition
This KB article is an excerpt from our 430-page book (some picture pages, but no scatch and sniff) 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 online, click on the fancy buttons below or visit our webpage which provides more information at-