Corporations or LLCs with corporation elections are required to pay a reasonable compensation.
An officer of a corporation who provides services to the corporation is generally considered as an employee of the corporation
The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.
As an officer of a corporation, you must be paid reasonable compensation
Reasonable compensation is defined as “commensurate with your duties” and “the value that would ordinarily be paid for like services by a like enterprise under like circumstances” (from the IRS articles below)
Reasonable compensation is subject to employment taxes
Reasonable compensation must be processed via payroll on a W2
Your W2 figure is the starting figure to calculate contributions from
Pass-through income reported on Form 1120S (Schedule K-1) is not considered self-employment income and cannot be counted toward calculating contributions to the Solo 401k for those with a corporation
Your Solo 401k contributions are based on your compensation from the adopting business of your Solo 401k. Your compensation determines the amount you can contribute.
Compensation must come from the adopting business of your Solo 401k, not from an outside company or source
Compensation is what that adopting business is paying you
Compensation is subject to self-employment or payroll taxes
You cannot contribute more than what you earn in compensation
Since your Solo 401k contributions are based on your compensation, it’s important to define compensation correctly.
So what is compensation?
Compensation is active, not passive, income
Active income is earned from your business activity. Rental income from properties is passive and would not qualify as compensation.
Defining compensation depends on the tax status of the adopting business
If your adopting business is a:
Sole proprietorship (or LLC taxed as a sole proprietorship)
Partnership (or LLC taxed as a partnership)
Your compensation is defined as “earned income”. This is roughly:
Net earnings (business revenue – business expenses) – ½ your self-employment tax
*Technically, your final compensation figure as a self-employed individual would not include your contributions, as they will be deducted. However, the above formula can be a start for calculating the compensation figure. This is a “circular calculation”- your compensation figure depends on your contribution figure, and your contribution figure depends on your compensation figure.
If your adopting business is an:
S-corporation (or LLC or partnership taxed as an S-corporation)
C-corporation (or LLC or partnership taxed as a C-corporation)
Starting in 2026, all catch-up contributions made to the Solo 401k by a higher-paid employee must be made as a Roth. This is per the IRS’s recently released final regulations for the SECURE Act 2.0, Section 603.
What are catch-up contributions?
Individuals who are 50 and above by the end of the taxable year are allowed to make catch-up contributions to their 401k
In 2025, the catch-up contribution limit was $7,500
Individuals who turn 60, 61, 62, or 63 by the end of the taxable year are allowed to make super catch-up contributions to their 401k
In 2025, the super catch-up contribution limit was $11,250
The mandatory Roth catch-up contribution applies to both types of catch-up contributions listed above
Catch-up contributions were allowed to be made as pre-tax or Roth in previous years, but SECURE Act 2.0 now requires that all catch-up contributions must be made as Roth, starting in 2026, if made by a higher-paid employee
What is a higher-paid employee?
The IRS defines a higher-paid employee as an individual who earns more than $150,000, indexed, in W-2 wages from the adopting business of the plan. This is the figure reported in Box 3 of your W-2 from the adopting business of the plan.
This definition applies to W-2 employees only
If you are a sole proprietor, for example, and are not a W-2 employee of your adopting business, you are not defined as a higher-paid employee. You would be able to make your catch-up contribution as either pre-tax or Roth.
To review, the mandatory Roth catch-up contribution applies only to:
Any participant who is 50 and above by the end of the taxable year, and
Who wants to make a catch-up contribution to their Solo 401k, and
Who is a W-2 employee of the adopting business of the plan, and
Whose wages for the preceding year exceed 150,000 (indexed)
Additional background
The SECURE Act 2.0, Section 603 required that certain participants make all catch-up contributions as Roth for taxable years after 2023
However, the IRS designated 2024 and 2025 as “administrative transition” periods in which catch-up contributions could still be made as pre-tax, without violating SECURE Act 2.0
The IRS recently released final regulations which confirm: the mandatory Roth catch-up contribution will be required for all taxable years, starting in 2026
For more information on calculating and making contributions, please visit our contributions page:
The SECURE Act 2.0 introduced a new limit to catch-up contributions to your Solo 401k, if you are age 60-63. These are referred to as “super catch-up contributions.”
Individuals who are 50 and above by the end of the taxable year are allowed to make catch-up contributions to their 401k
In 2025, the catch-up contribution limit was $7,500
Individuals who turn 60, 61, 62, or 63 by the end of the taxable year are allowed to make super catch-up contributions to their 401k, which are 150% of the normal catch-up contribution limit
In 2025, the super catch-up contribution limit was $11,250. In 2026, the super catch-up contribution limits remains at $11,250.
Super catch-up contribution limits are applicable only for those years in which a Solo 401k participant turns 60, 61, 62, or 63 by the end of the taxable year, starting in 2025.
Once the Solo 401k participant turns 64, they cannot make super catch-up contributions and are again subject to the regular catch-up contribution/for those age 50 and above.
Employer/profit sharing contributions can now be made as Roth, under the provisions of the SECURE Act 2.0.
Previously, employer/profit sharing contributions could only be made as pre-tax. If you wanted the funds as Roth, you would need to make the pre-tax employer contribution to the Solo 401k and then convert the funds to Roth within the Solo 401k.
The SECURE Act 2.0 now allows you to make an employer Roth contribution directly.
If you would like to make a Roth employer contribution, you are responsible for the following:
As employer, your business (which is the adopting business of your Solo 401k) takes the deduction as an employee benefit expense. This deduction is reflected on the company return.
Your Solo 401k issues a 1099-R to you as an individual/employee for the amount of the employer contribution
The 1099-R is completed as for a Roth conversion of pre-tax funds
Distributing funds out of the Solo 401k is called an “in-service distribution” when the Solo 401k plan and its adopting business are still active. The distributed funds can be rolled over into another retirement account.
Most clients do not want to roll funds out of the Solo 401k because of its checkbook control and ability to invest in a wide range of investments. However, there may be certain cases when a client wishes to roll funds out of the Solo 401k.
The ability to take an in-service distribution from the Solo 401k is based on:
Performing the rollover out of your Solo 401k, if eligible
You will be the one distributing the assets from your Solo 401k
Since you have checkbook control over your Solo 401k, you will need to move the funds on behalf of your Solo 401k. For example, to roll your Solo 401k into an IRA, you would write a check from the Solo 401k bank account to the IRA.
You are responsible for filing Form 1099-R for any rollovers out of your Solo 401k
Form 1099-R is required for non-taxable rollovers. This form must be distributed from your Solo 401k to you in January of the year following the distribution or rollover.
When is the deadline to establish a Solo 401k and make contributions to it? And is the deadline affected if I have an extension on my tax filing?
It depends on the tax status of the adopting business of the plan.
The tax status determines the tax filing deadline
The tax filing deadline is the deadline to establish and contribute to the plan
Note, however, that if you have an extension for your tax filing deadline, this may or may not affect the deadline to establish and contribute to your plan.
Tax Status
Filing Deadline
Extended Deadline
S-Corporation (or LLC taxed as S-Corp)
March 15
September 15
Partnership (or LLC taxed as a partnership)
March 15
September 15
C-Corporation (or LLC taxed as C-Corp)
April 15
October 15
Sole Proprietorship (or LLC taxed as sole prop)
April 15
October 15
Tax filing deadlines and extensions
Establishment
The SECURE Act allows employers to establish a Solo 401k for the taxable year, after the taxable year is over, if the plan is established by the tax filing deadline for that taxable year.
This may or may not be affected by an extension, depending on the tax status of the adopting business of the Solo 401k:
Adopting businesses with tax status of a partnership or corporation can establish a Solo 401k by the business’s tax filing deadline, including extension
Adopting businesses with tax status of sole proprietorship can establish a Solo 401k by the business’s tax filing deadline, no extension (April 15)
Employer contribution
All adopting businesses can make employer contributions to the Solo 401k by the business’s tax filing deadline, including extension
Employee contribution
Adopting businesses with tax status of a partnership can make employee contributions to the Solo 401k by the business’s tax filing deadline, including extension
Adopting businesses with tax status of corporation can make employee contributions to the Solo 401k by the end of the taxable year because the employee contributions must be processed through payroll
Adopting businesses with tax status of sole proprietorship can make employee contributions to the Solo 401k by the business’s tax filing deadline, no extension (April 15)
The employee/elective deferral contribution should be deposited into the Solo 401k within 7 business days of processing. If the employee contribution is made within that time frame, it is still counted as timely under the Department of Labor's safe harbor rule for employee contributions.
If the 7-business day deadline is not met, the employee contribution may not be counted as timely. The maximum deadline to deposit the employee contribution is the 15th business day of the following month. Although it is possible to deposit the contribution by that date, it does not fall under the Department of Labor’s safe harbor rules.
If you exceed the above deadline, this may constitute an operational mistake and potentially, a prohibited transaction.
Your plan documents note the following language:
Salary deferrals are deposited in the trust as soon as reasonably possible, following guidelines issued by the Department of Labor. (Summary Plan Description)
Elective Deferrals will be remitted by the Employer to the Trustee or custodian on the earliest date that they can reasonably be segregated from the Employer's assets, but in no event later than the 15th business day of the month following the month in which the Participant contributions are withheld or received by the Employer, unless under the regulations an extension of up to 10 business days is granted by the Secretary of Labor with respect to Elective Deferrals received or withheld in a single month.
In the case of a small plan (less than 100) participants the Department of Labor has provided a safe harbor option for depositing Participant contributions within 7 business days after the money is received or withheld from payroll. This seven day rule was finalized as of January 14, 2010. (Defined Contribution Plan Document)
Not following the above language is considered an operational mistake, and it may be possible to correct the operational mistake under the IRS's Employee Plans Compliance Resolution System (EPCRS).
Not following the above language may also give rise to a prohibited transaction, which cannot be corrected under EPCRS. Instead, it may be possible to correct the prohibited transaction under the DOL’s Voluntary Fiduciary Correction Program (VFCP).
For more information on these programs, visit the IRS’s pages:
The Automatic Enrollment feature can be added to your Solo 401k plan, allowing you to receive a $1500 tax credit over 3 years.
What it is
The Automatic Enrollment feature allows employers to contribute a default portion (e.g. 3%) of an employee’s wages to the retirement plan, on the employee’s behalf.
With the Solo 401k, you are typically both the employer and the employee. You may also have a spouse as an additional employee. By adding the automatic enrollment feature, you are setting a default contribution to be made for each employee in the plan.
With this feature, the IRS allows you, as the employer, to claim a $1500 tax credit over 3 years- a $500 dollar-for-dollar tax reduction per year if you maintain the arrangement over 3 years.
Applies to the employee contribution
With Automatic Enrollment, the employer must make at least a 3% salary deferral contribution for each employee. This is typically done as a pre-tax employee contribution.
However, the employee can elect to do otherwise by completing an election form within a certain time frame. The employee can elect to:
Make a portion or all of the contribution as Roth
Make a greater contribution than the 3%
Make a lesser contribution than the 3%
Not make the contribution at all
To make this election, the employee must complete the Deferral Election form. This form is located in our Miscellaneous Forms section:
The completed Deferral Election form is submitted to the plan administrator. Typically, this is you- you are the employee, employer, and the plan administrator.
The employee must complete the Deferral Election Form and then typically, also keep the form as plan administrator. This form must be completed within 60 days of receiving the notice.
Note that the limits for the employee salary deferral contribution still apply to this arrangement:
The employee salary deferral contribution limits still apply. For example, the limit for 2024 is $23,000.
The employee salary deferral contribution, as the employer profit sharing contribution, is based on your compensation from the adopting business.
The employee salary deferral contribution limits are per person, not per plan. If you have already reached the limit through another employer-sponsored plan for the year, you will not be able to make this contribution to this plan.
All employee elective deferral contributions, including those under this arrangement, cannot be withdrawn from the plan unless you are 59.5 or older.
Requirements for the arrangement
The Automatic Enrollment feature must be for the full plan year. It has two requirements:
Uniformity requirement: The arrangement must uniformly apply to all employees after giving them the required notice.
Notice requirement: A notice of the Automatic Enrollment must be given to all employees within a reasonable period of time, e.g. 30 days before the arrangement is adopted. Notices must also be given to all employees in subsequent years.
Your first notice is included in your set of plan documents (“Automatic Enrollment Notice”). Please review the notice carefully.
Claiming the tax credit
The $1500 tax credit is given over 3 years at $500 per year. You must maintain the Automatic Enrollment feature for all 3 years to claim the tax credit. The tax credit is a dollar-for-dollar reduction (vs. a deductible expense).
To claim the credit, you must file Form 8881 for the first year Automatic Enrollment was included in your plan:
See the section for Part II. Small Employer Auto-Enrollment Credit
You are responsible for this filing. Please make sure to file this in a timely manner.
What to do
Review the Automatic Enrollment Notice carefully
You are responsible for the administration of this arrangement. It is important that you are aware of your responsibilities under this arrangement.
Distribute the notice to all employees of the adopting business of your plan on an annual basis
Contribute to the plan per the default employee contribution or complete/keep the Deferral Election form, if doing otherwise
You must actually make the employee contribution(s) as stated in your arrangement. Or if doing otherwise, you must complete and keep the Deferral Election form to document the change.
The mega backdoor Roth strategy is a way to get more Roth funds into your retirement account. Roth funds are taxed initially but grow tax-free.
The mega backdoor Roth strategy consists of:
Making after-tax contributions to the Solo 401k, and
Converting those after-tax contributions to Roth within the Solo 401k, and
Keeping those Roth funds in the Solo 401k for checkbook-control investing or rolling over the funds into a Roth IRA
The Mega Backdoor Roth strategy offers an alternative to contributing to a Roth IRA directly, which is limited to $7,000 per year by the IRS. Many individuals also do not qualify for a Roth IRA due to their high earnings.
Your Solo 401k with Sense Financial already includes the features which allow you to utilize the mega backdoor Roth strategy.
How it works
Open separate accounts for your Solo 401k to house your after-tax contributions and Roth funds, if you do not have these already
From a banking standpoint, these separate accounts will be identical. Both are in the name of your 401k and using the EIN of your 401k. However, these accounts are established to keep the funds separate from each other and to assist you in your accounting of each type of fund within your 401k. You can assign nicknames to the separate accounts online in order to differentiate them.
Calculate the after-tax contribution based on your self-employment business earnings
Make the after-tax contribution into the 401k account for after-tax contributions
Once that after-tax contribution is in your 401k, immediately convert the funds to Roth and move those funds to the Roth account
Note that the growth on the after-tax contribution is taxable, so you will want to convert the after-tax contribution to Roth immediately after the contribution is made.
Keep those funds within the Roth account of your Solo 401k for checkbook-control investing or roll those funds over to a Roth IRA
The following year, file a 1099-R to document the conversion
How it should be reflected on a 1099-R
In this case, the 1099-R should document the conversion of the after-tax contribution to Roth within your 401k. The Payer is your 401k trust, which is issuing the 1099-R to you, the Recipient.
Payer: your 401k trust
Payer TIN: the EIN of your 401k trust (not the EIN of your adopting business)
Recipient TIN: your SSN
Recipient: you, as an individual
Box 1: Gross distribution: amount that was converted to Roth
Box 2a: Taxable amount: 0.00 if the after-tax funds were converted to Roth immediately. The taxable amount would be 0.00 since the after-tax contribution was not originally claimed as a deduction and was converted to Roth immediately. If the after-tax contribution was not converted to Roth immediately, the growth amount is taxable and should be entered here.
Box 5: Employee contributions/Designated Roth contributions or insurance premiums: amount of the original after-tax contribution. If you converted the after-tax contribution to Roth immediately after making the contribution, this should be the same amount as in Box 1
Box 7: Distribution code: G which indicates a direct rollover (from after-tax to Roth) within the plan, your 401k
When the 1099-R should be filed
The 1099-R is filed in the year following the year in which the Roth conversion was performed (e.g. the 1099-R for 2022 is filed in 2023). There are two deadlines for the 1099-R:
The Payee/recipient copy must be received by January 31st
The electronic copy must be filed with the IRS by March 31st
You are responsible for the filing of the 1099-R by both deadlines.
