One person 401 (k)s, also known as "solo" or owner-only 401(k)s. Under the law, employee deferrals will not be counted toward the 25% of compensation limit for deductible employer contributions. This allow you to take a deductible employer contribution of up to 25% of your sideline income, plus the maximum $11,000 employee deferral in 2002

So if your sideline business is set up as a corporation and you are an employee, your employer contribution could be $5,000 (25%) on $20,000 worth of outside income. Plus, you can add an $11,000 employee deferral and an extra $1,000 can be contributed if you are age 50 or older.

So your maximum total contribution would be $17,000 ($5,000 plus $11,000 plus $1,000) for this year if you are 50 or older. However, the $11,000 employee deferral figure is the maximum total deferral amount allowed from both your regular job and your sideline activity.

The calculation is a little different if you’re self employed or if your business is not incorporated. In essence, your employer contributions is 20%, or $4,000 on $20,000 worth of income, plus another $11,000 employee deferral. And the $1,000 over 50 "catch up" contribution. So your maximum total contribution here is $16,000 ($4,000 plus $11,000 plus $1,000).

If your spouse is on the payroll, the numbers may double.