Hello, there is a specific type of 401(k) retirement plan known as a
solo 401(k) (sometimes called an individual 401(k)). It is different
than a regular 401(k) because it is only available to self-employed
individuals with no employees. There are two possible annual
contributions. One is known as the profit sharing contribution and the
other is the deferral.

My question is specifically around the employee deferral and how one
takes the deduction from your tax return. I've been unable to
determine what form or schedule should be used to show the employee
deferral. Keep in mind that a self-employed (sole-proprietor) does not
receive a W-2 form. The significant difference between the deferral
and the profit sharing contribution is that the deferral is subject to
FICA taxes.

So, where do I deduct the employee deferral on my tax return. The
income is shown on Schedule C.

thanks

Dear gincalifornia:

I operate a SIMPLE-IRA plan for myself, which is handled similarly. 
All contributions for the self-employed, whether they made by the
employer or the employee, go on Line 32 of Form 1040 (2004 version). 
Only contributions for employees other than yourself go on Schedule C.
 The third source provides a detailed example showing the relevent
calculations.

"Publication 560" IRS (2004) p. 14 (column 3)
http://www.irs.gov/pub/irs-pdf/p560.pdf

"Instructions for Schedule C" IRS (2004) p. 5 (column 1)
http://www.irs.gov/pub/irs-pdf/i1040sc.pdf

"Tax Strategy for Self Employment Income Part 5" by MM, PFBlog
(September 1, 2005) http://www.pfblog.com/archives/3635_tax_strategy_for_selfemployment_income_part_5_individual_401k_analysis_resources.shtml

Sincerely,

Wonko

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Request for Answer Clarification by gincalifornia-ga on 01 Oct 2005 17:55 PDT

Thanks for your response, but it doesn't get at the key part of my
question. I've seen IRS pub 560 and other things on the IRS site. If
the employee deferral is subject to FICA, it can't be lumped together
with the other contribution on the same line. That is the key part of
my question. How does the individual end up paying FICA on the
deferral would be another way to ask it. thanks

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Clarification of Answer by wonko-ga on 02 Oct 2005 10:08 PDT

In the case of the self-employed, both the employer and employee
contributions are subject to FICA because they are not deducted on
Schedule C.  The same is true for the self-employment deduction for
health insurance premiums.

The business profit on Schedule C is used to determine the amount of
FICA tax owed using Schedule SE.  The deductions for the employer and
employee contributions for the sole proprietor occur on Form 1040, so
they are both subject to FICA tax.  Only employer contributions made
for employees other than the sole proprietor are deducted on Schedule
C and therefore not subjected to FICA tax.

Sincerely,

Wonko