Officer Compensation with Solo 401k Plan Deferral

By Jason Watson, CPA
Posted Monday, October 23, 2023

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 $23,000 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 $23,000 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		23,000
CR Cash		33,560

Line 7 Officer Compensation would read $50,000, but Box 1 of your W-2 would read $50,000 less $23,000 for 401k or $27,000. Your adjusted gross income on your individual tax return would be $27,000 less $10,000 for health insurance or $17,000. 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!