How much can I contribute to my corporation sponsored Solo 401k?

For those whose self-employed business is an S-corporation or a C-corporation, the solo 401k contributions will be based on W-2 wages (compensation not investment gains).  

Contributions to a solo 401k comprise of two components: an employer profit sharing contribution and an employee salary deferral contribution.

Important: Owners of Sub-chapter S corporations must base their contributions on Form W-2 income and may not base Solo 401k contributions on pass-through profits.

Once the incorporated business owner's compensation is determined (or estimated in the case of advance planning), the maximum Solo 401k contribution is determined as follows, based on 2016 limitations.

Step 1: Determine maximum profit sharing contribution
maximum profit sharing contribution = .25 x W-2 compensation
Step 2: Determine maximum salary deferral
maximum salary deferral = lesser of $18,000, or
compensation-maximum profit sharing contribution

Step 3: Calculate maximum Solo 401(k) contribution
maximum Solo 401(k) contribution = maximum profit sharing contribution
+ maximum salary deferral

Important:The maximum Solo 401(k) contribution for 2016 may not exceed $53,000 (unless your age 50 or older and therefore qualify for an additional $6,000 of catch-up contributions).

Closing comments: Often individuals base their annual solo 401k contribution on passive income instead of W-2 income so don't confuse the two as both the employee and employer solo 401k contributions are based on W-2 income not passive income. What is more, both the employee and employer contributions can me made up until the business tax return plus any timely filed extensions. The reason why both contribution types (employee and employer) can be made by the business tax return due date is because a solo 401k is not subject to Title One of ERISA since a solo 401k does not allow for common-law employees (i.e., non-business owners). 

To learn more about the solo 401k contribution limits, VISIT HERE.