I work as an independent contractor and am paid through an LLC I set up for myself and which for the 2022 year, I elected to be taxed as an S-Corp (also I have no other employees). 2022 was my first year as a non-W2 worker, so I'm a bit new to this. But I think I screwed up choosing a solo 401(k) and my accountant, soon to be former accountant, has not been a lot of help.
Allowable Contribution Calculations
I wanted to see how successful my solo venture turned out before committing to a retirement contributions, but throughout the year I paid myself a nominal W2 salary through the company. Luckily the venture turned out to do well and the company made enough that 25% of its net adjusted earnings would have been able to provide max the $61k for the SEP (entirely from the company) or the solo 401(k) (20,500 from my salary, and 40,500 from the company). However, it seems I misunderstood the usage of earnings in my situation and the 25% is actually not calculated from the Company's earnings, but as the amount I paid myself in salary which was quite low. (Is this actually correct?)
Timing of Contributions
So prior to the end of 2022 I set up a solo 401(k) which I'm planning to fund prior to my tax filing. If the above is true, I assumed this was better than the SEP because I could still contribute $20,500 as an employee and 25% of my salary as an employer (which would add about another ~$14k) whereas the SEP would only allow me to contribute the 14k. However I now read in several places that the employee contribution must be made within 7 days of each paycheck and that I can't just fund the $20,500 all at once, meaning I'd be left with only being able to contribute the $14k from the Employer portion. Is this true? How would the IRS even know and why would they allow you to setup a solo 401(k) until the end of the calendar assuming that your W2 wages would be paid throughout the year?
TLDR questions -
1) Is it correct that for a sole owner/employee LLC taxed as an S-Corp that the max 25% employer contribution for a solo 401(k) is calculated off of the W2 wages paid to the owner as an employee and not 25% of the revenue of the company (or the amount that would be part of the distribution in the K-1)
2) If #1 is correct, does the Employee portion of the contribution need to be made "in a timely manner" (within a week I believe) of being paid or can I just write a check to fund the entire employee contribution prior to the tax filing date. I only set up the account in December which is allowed so it didn't exist when I ran payroll the first 11 times in 2022. And is there a proper way that you need to separate employer/employee contributions when making the payment to the fund?
Allowable Contribution Calculations
I wanted to see how successful my solo venture turned out before committing to a retirement contributions, but throughout the year I paid myself a nominal W2 salary through the company. Luckily the venture turned out to do well and the company made enough that 25% of its net adjusted earnings would have been able to provide max the $61k for the SEP (entirely from the company) or the solo 401(k) (20,500 from my salary, and 40,500 from the company). However, it seems I misunderstood the usage of earnings in my situation and the 25% is actually not calculated from the Company's earnings, but as the amount I paid myself in salary which was quite low. (Is this actually correct?)
Timing of Contributions
So prior to the end of 2022 I set up a solo 401(k) which I'm planning to fund prior to my tax filing. If the above is true, I assumed this was better than the SEP because I could still contribute $20,500 as an employee and 25% of my salary as an employer (which would add about another ~$14k) whereas the SEP would only allow me to contribute the 14k. However I now read in several places that the employee contribution must be made within 7 days of each paycheck and that I can't just fund the $20,500 all at once, meaning I'd be left with only being able to contribute the $14k from the Employer portion. Is this true? How would the IRS even know and why would they allow you to setup a solo 401(k) until the end of the calendar assuming that your W2 wages would be paid throughout the year?
TLDR questions -
1) Is it correct that for a sole owner/employee LLC taxed as an S-Corp that the max 25% employer contribution for a solo 401(k) is calculated off of the W2 wages paid to the owner as an employee and not 25% of the revenue of the company (or the amount that would be part of the distribution in the K-1)
2) If #1 is correct, does the Employee portion of the contribution need to be made "in a timely manner" (within a week I believe) of being paid or can I just write a check to fund the entire employee contribution prior to the tax filing date. I only set up the account in December which is allowed so it didn't exist when I ran payroll the first 11 times in 2022. And is there a proper way that you need to separate employer/employee contributions when making the payment to the fund?