Where Do I Enter Contributions to Retirement Plans for Self-Employed Individuals?

Self-employed individuals can contribute to a variety of employment-based retirement plans, including SEP-IRAs, Solo 401(k)s, SIMPLE IRAs, and even defined benefit plans (i.e., traditional pensions). When the taxpayer is the owner of the business filing a Schedule C as a sole proprietor or LLC (or a general partner reporting partnership income on Schedule E), those employer contributions are eligible for a deduction on the taxpayer's personal return.


Schedule C Businesses:

Sole Proprietorships, Qualified Joint Ventures, and Single-Member LLCs (also referred to as disregarded entities by the IRS), as well as contract "gig" workers that receive 1099s instead of W-2 wage income, generally record business activities on Schedule C. 

If you are trying to model scenarios involving self-employed retirement plan contributions for a Schedule C business, you'll want to note them in the "Self-Employed Plans" Worksheet, which is accessible by clicking the pencil icon circled below in the "Schedule 1 Deductions (Above the Line)" section. Self-Employed Plan contributions also impact the calculation of Qualified Business Income (QBI), as noted in this article.

Clicking that icon will bring up the "Self-Employed Plans" Worksheet, where users can enter any self-employed plan contributions where shown outlined in green below.





Within this worksheet, Holistiplan will display the maximum contributions to a SEP-IRA, Solo 401(k) Contribution, or SIMPLE IRA based on the entered amount of SE income. These limits reflect the Deduction Worksheet for Self-Employed individuals found in IRS Publication 560. To see the audit for the contribution calculations, click the calculator icons next to the corresponding contribution amount.

Note that any amount entered here will also display on the main Scenario Analysis screen in the Schedule 1 Deductions section. Holistiplan will also automatically back out any contribution amounts in determining the amount of Qualified Business Income for the resulting QBI Deduction.

Also, if your client has multiple 401(k)s or SEP accounts, be sure to be mindful of the overall aggregate plan limits across plan types as stated by IRS §415(c).

This becomes more important if a client has both W-2 income and Schedule C income, as the calculation for the maximum Solo-401k contribution assumes both employer and employee contributions. If the taxpayer is already making contributions to a 401k/403b associated with a W-2 job, then you will want to make appropriate adjustments to the max contribution to the Solo 401k, as Holistiplan will not automatically make that adjustment. 

Defined Benefit Plans:

Business owners with high amounts of predictable business income can potentially achieve greater tax savings and larger contribution amounts by using a defined benefit plan. This is because contributions to these plans are not governed by annual maximums, but rather by the contribution necessary to maintain funded status for a specified benefit in retirement. While the benefit amount is capped at a certain amount, the amount necessary to contribute each year is not, as that amount depends on the plan's assets, return assumptions, benefit amounts, etc. 

Holistiplan does not have a calculator to determine the annual funding amount for a defined benefit plan, as the plan sponsor needs to work with an actuary to determine the annual contribution amount each year. But once determined, the taxpayer will enter that amount in the same place as a contribution to a SEP IRA, Solo 401k, etc., namely in the Self-Employed Contribution field on Schedule 1. 

Schedule E Partnerships or S-Corps:

If the business in question is an S-Corp (or an LLC being taxed as an S-Corp), the employer portion of retirement plan contributions - including those made on behalf of the owner - are captured on the business return, which exists outside the scope of Holistiplan.

The net impact of those contributions, however, reduces Schedule E net income that will ultimately be captured on Schedule 1. You can adjust that Schedule E net income by clicking on the pencil icon below. You may wish to use the calculation rows within our Field Notes feature to capture the composition of that net income.




That reduction in net income on Schedule E will also reduce QBI, so you will also want to update the QBI entered in that section of Scenario Analysis, as well as adjusting the entry for the line 4b adjustment for active business income for the calculation of Net Investment Income (NIIT) in the Form 8960 area of the 'Other Taxes' section in Scenario Analysis.

One of the requirements of an S-Corp is that shareholders be paid reasonable compensation in the form of wage income. As such, any employee contributions to self-employed retirement plans are reflected by adjustments to taxable wages from the business in the Wages Worksheet within Scenario Analysis, accessible by clicking on the pencil icon circled below.

For partnerships where the taxpayer is a general partner, things are a little trickier. First, because Holistiplan treats Schedule E income at a high level without attribution to the nature of the income (e.g., rental, royalty, partnership, S-corp, etc.), we are unable to calculate the maximum contributions to any self-employed plan like we can with Schedule C entities.

Second, what you will want to display in Scenario Analysis depends on the nature of the underlying retirement plan:

• SEP and SIMPLE IRA contributions should be entered similar to how they might be for Schedule C entities, with the contributions entered as deductions on Schedule 1.Note that these deductions will reduce the amount of QBI generated by the partnership.
• Solo 401k contributions are handled similarly to an S-corp, with the employer portion of the contribution recorded on the partnership business return. The employee portion of a solo 401k contribution for an active partner will be reflected in a lower distribution on Schedule E.