Q: Who is a self-employed individual?
A: Business owners who report compensation through a Schedule K-1 or Schedule C are considered self-employed. This includes sole proprietors, partners in partnerships, partners in LLPs, and members of LLCs taxed as partnerships.
This does not include owners of entities taxed as S-Corporations, whose eligible income is driven by their W-2.
Q: What is a salary deferral election in a 401(k)?
A: This is your documented decision to put aside some of your own pay into your 401(k) plan instead of taking it as regular income.
Q: When do I have to decide how much to defer for myself?
A: If you are self-employed, you must document your election by the end of the tax year, or December 31.
The IRS treats your compensation as available on the last day of your tax year, even though you may not know your final earned income until you complete your tax return, often months later. Your election must be made before compensation is deemed available.
This deadline is about the election itself, not the funding. You'll deposit the actual contribution later once your income from self-employment is known, but the decision to defer must be documented by December 31.
Once made, your election is binding and non-revocable.
Q: How do I document my deferral election?
A: Log into your 401(k) account on your plan recordkeeper's website to document your contribution amount.
Q: Can I change my election during the year?
A: Yes, you can change your deferral election any time before December 31 by updating your contribution election on your plan recordkeeper's website.
Q: When do I actually fund my contribution?
A: Funding generally happens after year-end, once your actual income from self-employment is known. Work with your tax advisor or accountant to determine this timing.
Q: What if I miss the December 31 deadline?
A: If you miss the December 31 deadline, you've lost the opportunity to make elective deferrals for that entire tax year. There is no retroactive fix; the IRS does not allow late elections. You can still make employer profit-sharing contributions, if your plan allows, by your tax filing deadline.
Q: Will I miss out on matching contributions if I don't contribute during the year?
A: No. You will not lose your employer match just because you fund contributions after year-end instead of through pay period deposits with your employees.
Q: Can I defer from my draws during the year?
A: Yes, you can. You don't have to wait until year-end as long as you've made a deferral election first.
However, there are some caveats to consider: draws must be based on reasonable estimates of your earned income for the year, and you must be comfortable managing certain risks.
Q: What are the risks of deferring during the year when I have self-employment income?
A: Because your final earned income won't be truly known until after year-end, deferring during the year carries some risk. If your actual earned income is lower than expected, your deferrals might exceed what you're allowed to contribute, requiring a refund (and possible penalties) back to you.
Practical approach: Consider deferring in fixed dollar amounts rather than percentages, and defer conservatively if you can't forecast your income accurately until late in the year.
Q: What happens if I contribute during the year but end up with little or no earned income?
A: If you contributed throughout the year but your final tax return shows you had less earned income than anticipated or no earned income, you have exceeded the IRS contribution limits and need to correct this inadvertent error. The plan will:
Distribute your excess deferrals plus earnings back to you
Report the distribution as taxable income to you
Move any matching contributions to a suspense account used to reduce future employer contributions
This is why we typically suggest a year-end election approach; it helps you manage this risk well.
Q: What if I receive both W-2 wages and K-1/Schedule-C income?
A: This usually happens if you have more than one business and they are taxed differently. You can defer from both income sources, but your total combined deferral cannot exceed the annual limit.
Important requirements:
Both businesses must participate in the 401(k) plan
W-2 deferrals must be withheld through payroll by December 31 and deposited following DOL timing rules
Self-employment deferrals follow the year-end election process described in these FAQs
Tax reporting:
W-2 deferrals appear on your Form W-2
Self-employment deferrals are reported on your Form 1040 (individual tax return)