Self-employed Individual's deferral and 415 limit

[spei7426]

A normal 50 sole proprietor client in 2025 who is the sole participant of a 401(k) plan. Client is not participating/deferring in any other plans.

Below is how we calculated the contribution breakdown for 2025, to simplify the numbers we are using $23,500 as the net Schedule C income after SE taxes:

• 25% PS contribution: $4,700
• Deferral: $14,100 
• Catch-up: $4,700                    
• Total contribution is $23,500 and the earned income for the plan is $18,800

Question:

So the net maximum contribution is no different than had the participant made $23,500 401(k) and no employer contribution.  Do you agree the maximum total deductible contribution for this owner is $23,500?

[Bri]

True, you end up with the same max whether it's PS + K versus all being K, but you don't have any catchups since he's below the 402(g) max.

[justanotheradmin]

he has catch-up due to being over the 415 limit, not the 402g. 

I don't think the amount above 18,800 is actually deductible though if there is no income to apply it against, but will leave that question to people who actually prepare tax returns for sole props. 

[Lou S.]

You can't deduct more than 100% of the earned income for the sole proprietor so in your case the deduction would be limited to $18,800.

You MIGHT be able to recharaterize the non-deductible 401(k) as ROTH since it doesn't exceed 415 limit though I'm not sure the mechanics of that or if there is authority in the code to do so.

[Bri]

415 limit is 100% of pay, not to be confused with the 25% 404 limit.  None of this needs to be "employer" money.  Every dollar of "profit sharing" reduces his Earned Income by the same dollar he could have done more deferral from.  

[CuseFan]

Any way this gets sliced, the person's net taxable income should deduct to zero.