makes sense, your 'paying' yourself with your own money, which has already been taxed at source.

I take it this does not trigger taxes because thedistribution is effectively only reallocating funds that are yours rather than a true 'income'?

Distributions from a 401(k) plan are not subject to self-employment taxes. Taking a distribution from the plan, early or not, does not impact self-employment taxes. Self-employment taxes are only imposed on net earnings from self-employment (e.g., annual profit from a sole proprietorship as reported on Schedule C).

  szl01koch wrote: Does taken early distribution of a 401K affect the amount of self employment taxes you pay?  Does it make a difference if your self employed or operating as a LLC on the taxes paid on a 401K early distribution?......     Unless you actually get paid a salary\wages from the LLC you are still considered 'self employed'. The fact is, if you're paying your own salary\wages you will still pay the full amount for medicare and social security. Remember, an employer pays half of your medicare and social security.   I honestly would bring the original question up with a professional tax attorney. There might be a few different routes you can take, especially with the large amount of changes in tax laws for 2009. I personally wouldn't go on the suggestion of someone you found on the internet.

There are several exemptions from the early distribution penalty. I suggest you look them over carefully. If you started your business in 09 and struggled to make a profit you may qualify for one of the exemptions from the early distribution penalty.

You pay self-employment taxes on the net profit from your business. If you took the 401K early distribution from a former or current employer, not from the business you own, then the distribution doesn't affect self-employment taxes. Be aware that you will have to pay a 10% penalty for taking the money out early.