Solo or single-participant 401K

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rslheath
rslheath Member Newcomer

To save you all some work. As of the 2023 tax year, FreeTaxUSA can not accommodate a Solo 401K and its documentation in the support center re Solo 401Ks is incorrect.

A self-employed person with no employees (or just a spouse) may contribute both the employee and the employer's (also called the Plan) portion to their 401K. If you work for and by yourself—this is a fantastic opportunity to shelter almost twice what you could as an employee. Per IRS rules, both the employees and the plan's (employer's) contribution must be posted to line 16 on Schedule 1. (See: https://www.irs.gov/retirement-plans/self-employed-individuals-calculating-your-own-retirement-plan-contribution-and-deduction

FreeTaxUSA will replace that number with ONLY the employee's contribution.

Note that—per my experience—the support staff are not familiar with solo 401Ks so that you are likely to get into a run around as they try to prove that you are wrong.

Support finally conceeded that their system could not accommodate it. I was told "maybe next year." So if you are working on tax year 2024—check first before doing your taxes here. But you will have to go somewhere else for your 2023 taxes.

Comments

  • Henry
    Henry FreeTaxUSA Agent
    edited March 5
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    Hi rslheath! Thanks for your post. I wanted to clarify that we do have some support for employee and employer contributions—specifically solo 401(k) contributions.

    If you, as the business owner, are included in the retirement plan, there is no differentiation between employee and employer contributions for the purpose of reporting the contributions (and adjustment) on your return, although you will need to make sure you have calculated your allowed contributions correctly, based on your plan's limitations.

    In our software, the way to report that amount on line 16 of Schedule 1 is to select Deductions/Credits > SEP Contributions from the menu. Answer YES when asked if you have a SEP, SIMPLE, or other self-employed qualified retirement plan. You'll see two entry boxes there.

    The SEP deduction may be reduced, based on the "Deduction Worksheet for Self-Employed,"
    but entries in the "Keogh, SIMPLE, or other plan" field will only be limited to your net profit from self-employment. The appropriate place to account for solo 401(k) contributions is as a "Keogh, SIMPLE, or other plan." When you do this, the deduction is not calculated by our software, and it is up to you to determine the appropriate amount of deductible contributions and enter it there.

    You should use the rate table or worksheets in Chapter 5 of IRS Publication 560 to figure your deductible contributions to your solo 401(k) plan.

    I hope this makes sense. Please let us know if you have further questions!

  • Henry
    Henry FreeTaxUSA Agent
    edited March 5
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    rslheath, we have looked into this further, and I have updated my response above with new information. Let us know if you have any other questions!

  • MrSolo
    MrSolo Member Newcomer
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    The problem is your software doesn't calculate Retirement Savings Credit correctly for self-employees with solo 401k. It shows zero even though I'm supposed to get the credit. Last year I used a different software, that one calculated the credit correctly.

  • Henry
    Henry FreeTaxUSA Agent
    Options

    Hi MrSolo, there are a few things to consider when determining your eligibility for the Retirement Savings Contributions Credit.

    -It is only available to taxpayers with AGIs of up to $36,500 for Single taxpayers ($73,000 or less on an MFJ return).

    -You aren't eligible if you are a full-time student, younger than age 18, or claimed as a dependent by your parents or someone else.

    -If you have received pension distributions (Form 1099-R) in the past three years, the amount of distributions received reduces the amount of retirement contributions that are eligible for the credit.

    -The credit is not refundable, so if your income is low enough that you do not have any tax (on line 16 of Form 1040), then you won't receive a Retirement Savings Contributions Credit.

    Our software automatically calculates if you receive the Retirement Savings Contributions Credit based on the 401(k) contributions you enter and the income you enter on your tax return. If you'd like us to look into why that credit is not being applied to your return, please sign in to your account and contact Customer Support so that they can review your entries and walk through the calculations with you. We'd love to make sure you are getting that credit if you qualify.