How does a single member LLC deduct 401k from payroll when there is no payroll?

[Guest dogrescuer]

I am a single member LLC. Last year I converted a SEP IRA to a 401k in order to be able to defer more income from taxes. Schwab tells me that I have to make contributions no later than 15 days from each payroll. I don't have a payroll. The LLC is a pass through enttity. My income is receipts minus expenses. There is no W2 involved.

Based on the IRS pub 560

http://www.irs.gov/pub/irs-pdf/p560.pdf

it looks like my 401k is a Qualified Plan: Defined Contribution Plan. Therefore my deferral is due by april 15 2012 for 2011 contribution. I'm very confused though as to whether this is correct, partly because I thought if there's no w2 then there are no "employees" or "employer."

Can anyone explain to me:

whether it's possible I don't have the defined contribution plan type of 401k?

when my deferral deadline is?

what deferrals I can make on my behalf as employee and my behalf as employer?

thank you so much.

[imchipbrown]

My LLC "return" is a Schedule C attached to Form 1040. If I make 401k deferrals, they go on the front of the 1040 (Line 28?). I make them as and when I see fit, mindful that I better show income so as not to make non-deductible contributions.

Maybe Schwab is mindful of DOL deposit guidelines as they would relate to employees? Is the Schwab account Custodial or non-custodial. If it's their document, probably custodial....

[Bird]

This is why Schwab has no business setting up 401(k) plans. We are constantly cleaning up messes of them and their ilk.

Anyway...no, you don't have payroll. As a Schedule C filer, your employEE and employER contributions are all mushed together on your 1040, line 29 I think. For tax purposes, deposits are due by April 15. But the Department of Labor has guidelines that say employEE contributions have to be deposited more-or-less right away after they are withheld from pay. The ultra conservative approach for complying with those guidelines is that since your income is determined on Dec 31, you should get your 401(k) contributions in shortly thereafter (first week of Jan). If you don't...well, then you (the employer) are considered to be holding onto your (the employee) money "too long" and...you still get the deduction, but you're supposed to add interest. 99.5% of your single-employer one-person plan comrades don't have a clue about this and consider April 15 to be the deadline, and blissfully go on their merry way, so you might as well too.

I can pretty much assure you that you're doing lots of stuff wrong, and/or will do lots of stuff wrong because their are all kinds of rules with qualified plans that you can't even imagine. If you want to run it right, hire some local pension consultant. Neither Schwab nor your accountant will give you reliable advice.

[masteff]

Has the DOL ever provided guidance on the extent to which the deposit rule applies to the self-employed? This is one where we should make the IRS and the DOL get in a ring and fight it out. IRS Pub 560, page 15, says contributions are due by filing date of your tax return for the year. http://www.irs.gov/pub/irs-pdf/p560.pdf

[K2retire]

Has the DOL ever provided guidance on the extent to which the deposit rule applies to the self-employed? This is one where we should make the IRS and the DOL get in a ring and fight it out. IRS Pub 560, page 15, says contributions are due by filing date of your tax return for the year. http://www.irs.gov/pub/irs-pdf/p560.pdf

I always understood their position to be that the deposit had to be made as soon as administratively feasible after the amount of income from which it could be withheld was determined.

[Bird]

Has the DOL ever provided guidance on the extent to which the deposit rule applies to the self-employed? This is one where we should make the IRS and the DOL get in a ring and fight it out. IRS Pub 560, page 15, says contributions are due by filing date of your tax return for the year. http://www.irs.gov/pub/irs-pdf/p560.pdf

I think this IRS guidance is referring to employer and "employee" (i.e. nondeductible employee) contributions. But I don't think there's any doubt that deferrals are deductible if made by the tax return due date for self-employeds. It's just a matter of whether they are "late" and subject to lost gains. (If we're being honest, I don't they care about self-employeds.) I know I've seen posts here about guidance that says the clock starts running after the contributions are "determined", and I argue that at best, that applies when a self-employed elects a percentage and not an amount - $16,500 is "determined" the moment it is put in writing.

[QDROphile]

Have we lost the deadline for electing the deferral of the 401(k) part of the contribution or does that not matter to this discussion?

I think the discussion also assumes that the LLC has not elected to be taxed as a corporation.

[ETA Consulting LLC]

Have we lost the deadline for electing the deferral of the 401(k) part of the contribution or does that not matter to this discussion?

I think the discussion also assumes that the LLC has not elected to be taxed as a corporation.

Benefitslink really needs a "like" button.

Remember, the actual "election" has to be made before the last day of the year. That is assuming that Fiscal Year of the LLC is the 12/31 just like the plan year. It is that "election" to defer that gives the extention of time for the actual "Earned Income from Self Employment" to be calculated.

And yes, it's a moot point if the S-Corp election is made, but it's apparent the organization is not taxed as a corporation.

Good Luck!

[TPApril]

Slightly different scenario - professional LLP firm has Partners, none of whom have over 5% ownership. One of these partners allocated 401(k) to payroll of 10/1/11 but does not actually deposit the check to the trust until 12/15/11. First off, for 5500 purposes, is that considered a late contribution, and if so, would lost earnings be allocated in that only an HCE would be receiving such lost earnings (ie discrimination?).

[ETA Consulting LLC]

Slightly different scenario - professional LLP firm has Partners, none of whom have over 5% ownership. One of these partners allocated 401(k) to payroll of 10/1/11 but does not actually deposit the check to the trust until 12/15/11. First off, for 5500 purposes, is that considered a late contribution, and if so, would lost earnings be allocated in that only an HCE would be receiving such lost earnings (ie discrimination?).

Is their income exclusively from "self-employement"? If so, then the partner only receives compensation on the last day of the fiscal year; which means the deferral would've been contributed from a draw (which is fine). Also, the DOL (unlike the IRS) typically does not view owners as employees of the company. The entire notion of "separate assets withheld from employee pay from company assets" is an employee protection issue. With that mindset, I'd say no corrective action is necessary.

There is some debate as to whether the answer would be different if the entity was incorporated (where the owners actually receive W-2). I tend to subscribe to the mindset that no fiduciary correction designed to protect the employees should be applied to the owners (especially when the correction is deposits of amounts). Believe it or not, the amounts deposited by the employer for such correction are deductible (they are just not deducted as contributions, but plan expenses). I understand and appreciate of the arguments to the contrary.

Good Luck!