The major question to address when it comes to Solo 401(k) tax filing is: Are there any annual tax filing requirements for the plan?
Since a Solo 401(k) plan is considered a trust, pursuant to Internal Revenue Codes (IRC) Section 401 and 501, there is generally no requirement to file annual state or federal income tax returns. However, if the assets total more than $250,000, there is one form that must be filed, IRS Form 5500-EZ (or 5500-SF).
What is a Solo 401(k) Plan?
A Solo 401(k) is basically your standard workplace 401(k) plan that was designed for the self-employed individual. It was developed for the solo proprietorship and owner-only business in mind. The IRS wanted a cost effective retirement plan that was easy to administer. There’s no need for a business owner to waste time and money complying with the complex rules and regulations of a traditional 401(k) plan.
There are only two eligibility requirements to open a Solo 401(k) plan: 1) the presence of self-employed income and 2) no other full-time employees employed by the business (other than a spouse). Arguably, the Solo 401(k) is the best option for retirement saving for the self-employed. They’re easy to operate, have high contribution limits and you can invest in a myriad of options (assuming the plan allows for it).
Solo 401(k) Tax Filing Rules
As we mentioned earlier, if your total assets in your Solo 401(k) are under $250,000, you don’t need to file anything! But, what happens when you exceed the $250K threshold? Well, you have to fill out an “information return” for the IRS. You have two choices of forms to fill out. First, is Form 5500-EZ, which can be mailed directly to the IRS. Secondly, is Form 5500-SF, which can be filed electronically online. You have until July 31 to file either form.
What does Form 5500 entail?
The IRS simply requires some general information about your plan. First, you’ll need Identification and Basic Plan Information about the Solo 401(k). This includes the beginning & end date, the name of the plan, the adopting employer and the number of participants. Next, you’ll have to input the Financial Information about the plan. This is where you need to show the assets and liabilities of the plan and how much it was valued at the end of the tax year. Finally, you need to answer if there are any outstanding loans from the plan.
It’s a fairly straight-forward form that most anyone can fill out. Note: If you are an IRA Financial client, we take care of the filing for you at no additional cost. Our tax specialists are always there to assist you if you have a question.
Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan, must be filed electronically through EFAST2. Again, it’s really easy to fill out online and is considered more accurate.
Check out the IRS “Form 5500 Corner” for more info.