Employee vs. Employer contributions

You'll often see Solo 401k contributions referred to as either "Employee" or "Employer" contributions. This can be confusing for many self-employed people and business owners, but it's an important concept to understand.

In a non-Solo 401k plan, that you might find at a large company, contributions are made either by employees into their own 401(k) account, or by their employer into their account.

Employee Contributions

Employee contributions are contributed from the employee's salary -- hence why they are also sometimes called "employee elective salary deferrals" --

  • "Employee" references the fact that the employee is the one contributing, as opposed to the employer on their behalf.

  • "Elective" means the employee has a choice of how much to contribute -- it can be nothing, or up to their annual limits. This is also where the contribution "elections" process comes from.

  • "Salary Deferral" refers to the fact that the employee's contributions come out of their salary. Put another way, the employee is choosing what percentage of their salary to "defer," or put into, their 401(k) account.

Employee contributions are made on either a pre-tax or Roth basis.

Employer Contributions

Employer contributions are contributed by the employer, on behalf of the employee, into the employee's 401(k) account. They are sometimes called "profit-sharing" contributions, which are usually a lump sum amount, or they can be a percentage match. In either case, there are annual contribution limits that the employer must follow.

Employer contributions are made on a pre-tax basis.

Self-Employed or Owner-Only Businesses

As a self-employed individual or business owner in an owner-only business, you are functionally both the employee and employer. This is also a requirement to have a Solo 401k.

What this means is you can decide whether to contribute as an "employee," or make "employer" contributions on behalf of yourself.

When deciding which to make, or how much to allocate to each type, you'll want to consider whether you want pre-tax or Roth contributions -- as Roth contributions must be made on an employee basis. You'll also want to factor in the different limits that each type have, which you can read more about here.