Mark Kohler explains the W-2 salary mistake S-corp owners make with solo 401(k)s. You need to set a reasonable W-2 salary, designate your 401(k) deferrals upfront, and you can amend it later. Allow 4-6 weeks to finalize, and talk to a tax advisor instead of going DIY.
If you're a small business owner considering a solo 401k, then you probably have an S corporation. And with an S corporation, you know you're pegging your reasonable salary or compensation with your W2 in the next few weeks. On that W2, you need to designate what you think you're going to put in your 401k next year. You don't have to put the money in, but you kind of have to earmark what you would like to put into the solo 401k. You can say it's traditional, it's Roth, whatever. Now, if you change your mind later, you can amend your W2, but we want to nail that W2 down as best we can in the next four to six weeks so that you don't have to worry about it. Then you can put the money in when you want next year and start building that solo 401k. Finally, there's a special form to claim this credit. It's form number 8881. And your tax advisor accountant should know exactly how to handle this. And you just want to let them know, I set up a new Solo 401k and I'm going to auto enroll myself. Your accountant should know. Ooh, ooh. You just got the tax credit. Let's take advantage of it. The problem is a lot of taxpayers aren't talking to their tax advisor or they're trying to pull this off on TurboTax. Please be careful with this. The DIY approach with tax planning when you're making money is not always the best methodology.
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