Self-Employed Retirement Contributions
Organize your Solo 401(k), SEP IRA, and estimated-tax planning with current IRS retirement contribution limits.
Self-Employed Retirement Contributions
Organize your Solo 401(k), SEP IRA, and estimated-tax planning with current IRS retirement contribution limits.
✓ Current IRS-source boundaries
✓ Solo 401(k) and SEP IRA comparison
✓ Built for net-profit and tax-deduction planning
Organize Your Contributions Book a Tax Strategy Session
### Plan With Current Facts
Understand the Options
Calculate Net Profit
Review Contribution Limits
Choose a Plan Type
Fund the Account
Claim the Deduction
Before payment
Source: Current IRS estimated-tax guidance
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Tax-review boundary
Retirement contributions are based on net earnings from self-employment, not gross revenue. Reconcile your business expenses and calculate self-employment tax before finalizing your maximum allowable contribution. Read current IRS estimated-tax guidance →
Jump to: Introduction SEP IRA Overview Solo 401(k) Overview Calculating Your Contribution Limit Impact on Estimated Taxes Sources
On This Page
– Introduction
– SEP IRA Overview
– Solo 401(k) Overview
– Calculating Your Contribution Limit
– Impact on Estimated Taxes
– Sources
– Frequently Asked Questions
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Educational planning guide
This page explains a federal planning topic. It cannot determine an individual payment, state obligation, deduction, penalty, or filing result. Use current official instructions and qualified review when facts are complex.
## Introduction
For self-employed individuals, independent contractors, and small business owners, saving for retirement is not just about building long-term wealth—it is one of the most powerful tax planning strategies available. Because self-employed individuals do not have access to an employer-sponsored 401(k) match, the IRS provides specialized retirement accounts that allow for significant tax-deductible contributions.
The two most common retirement plans for self-employed individuals are the Simplified Employee Pension (SEP) IRA and the One-Participant 401(k), commonly known as a Solo 401(k). Understanding the contribution limits, deadlines, and calculation rules for these plans is essential for optimizing your tax deductions and accurately projecting your quarterly estimated taxes.
## SEP IRA Overview
A SEP IRA is a retirement plan that allows an employer to make contributions toward their own retirement and their employees’ retirement. For a self-employed individual with no employees, the “employer” and the “employee” are the same person.
SEP IRAs are relatively simple to set up and maintain. They do not require the complex annual reporting that some other retirement plans demand. However, SEP IRAs only allow for employer profit-sharing contributions; they do not permit employee salary deferrals. [2]
For 2026, the maximum contribution to a SEP IRA cannot exceed the lesser of 25% of the employee’s compensation (or 20% of net earnings from self-employment for a sole proprietor) or $72,000. [1]
## Solo 401(k) Overview
A Solo 401(k) is a traditional 401(k) plan designed specifically for a business owner with no employees (other than a spouse). This plan offers higher potential contribution limits for many self-employed individuals because it allows you to contribute in two capacities: as the employee and as the employer.
1. Elective Deferrals (Employee Contribution): For 2026, you can contribute up to 100% of your earned income up to the annual limit of $24,500. Individuals age 50 or older can make an additional catch-up contribution. [1]
2. Nonelective Contributions (Employer Profit-Sharing): You can also contribute up to 25% of compensation (or 20% of net earnings from self-employment). [2]
Total contributions to a Solo 401(k) for 2026, excluding catch-up contributions, cannot exceed $72,000. [1] Because you can stack the employee deferral on top of the employer profit-sharing contribution, a Solo 401(k) often allows a self-employed individual to shelter more income at lower profit levels compared to a SEP IRA.
## Calculating Your Contribution Limit
If you operate your business as a sole proprietorship or a single-member LLC taxed as a disregarded entity, calculating your maximum allowable retirement contribution requires several steps. You cannot simply take 25% of your gross revenue.
The IRS requires you to base your contribution on your “net earnings from self-employment.” This calculation begins with your net profit (gross income minus deductible business expenses). From that net profit, you must subtract the deductible portion of your self-employment tax (typically half of the self-employment tax). The resulting figure is your modified net earnings. [2]
For the employer profit-sharing portion (applicable to both SEP IRAs and Solo 401(k)s), the maximum contribution rate for a sole proprietor effectively drops from 25% to 20% of this modified net earnings figure. The IRS provides a specific worksheet in Publication 560 to guide you through this calculation. [2]
## Impact on Estimated Taxes
Contributions to a traditional SEP IRA or a traditional Solo 401(k) are tax-deductible, meaning they reduce your adjusted gross income and your federal income tax liability. However, these contributions do not reduce your net profit for the purpose of calculating self-employment tax. You still owe Social Security and Medicare taxes on your full business profit before the retirement deduction is applied.
When calculating your quarterly estimated tax payments using Form 1040-ES, you should factor in your planned retirement contributions. If you intend to max out a Solo 401(k) by the end of the year, incorporating that deduction into your estimated tax worksheet will lower your required quarterly payments, improving your cash flow throughout the year.
## Sources
1] [IRS — 401(k) limit increases to $24,500 for 2026
2] [IRS — Publication 560, Retirement Plans for Small Business
## Funding Deadlines and Plan Establishment
The timeline for establishing and funding a self-employed retirement plan is a critical component of year-end tax planning. Missing a deadline can result in the loss of a substantial tax deduction for the current year.
For a SEP IRA, the rules are highly flexible. You can both establish a new SEP IRA and fund it up to the due date of your business’s tax return, including extensions. If you are a sole proprietor who files a Schedule C and you extend your individual tax return to October 15, you have until October 15 to open the SEP IRA and make your employer profit-sharing contribution for the prior tax year.
The rules for a Solo 401(k) are more restrictive. To make employee elective deferrals for the current tax year, you must formally establish the Solo 401(k) plan document by December 31 of that year. Once the plan is established by December 31, you generally have until your tax filing deadline (including extensions) to actually deposit both the employee deferrals and the employer profit-sharing contributions. However, if your business is an S Corporation or a C Corporation, employee deferrals must generally be deposited into the plan trust within a few days of the payroll date on which they were withheld.
## Entity Structure and Contribution Calculations
Your business’s legal entity structure fundamentally changes how your maximum retirement contribution is calculated. The calculation for a sole proprietor filing Schedule C is very different from the calculation for an S Corporation owner.
As discussed earlier, a sole proprietor must calculate their contribution based on “modified net earnings,” which requires subtracting half of the self-employment tax from the business’s net profit. This effectively reduces the maximum employer profit-sharing contribution rate from 25% to 20%.
If your business is taxed as an S Corporation, the calculation is much simpler, but the baseline is different. For an S Corp owner, retirement contributions are based strictly on the W-2 salary the corporation pays the owner. The corporation can make an employer profit-sharing contribution of up to 25% of the owner’s W-2 salary. The business’s remaining pass-through profit (the K-1 income) cannot be used to calculate retirement contributions.
This distinction is crucial for tax planning. An S Corp owner who takes a low W-2 salary to minimize payroll taxes will severely limit their ability to make large contributions to a SEP IRA or a Solo 401(k). Balancing the desire for payroll tax savings against the desire for maximum retirement deductions requires a comprehensive, multi-year tax strategy.
## Frequently Asked Questions
Can I have a Solo 401(k) if I have employees?
No. A Solo 401(k) is strictly for business owners who have no full-time employees other than a spouse. If you hire eligible employees, you must transition to a standard 401(k) or another type of plan.
What is the deadline to open and fund a SEP IRA?
You can establish and fund a SEP IRA up to the due date of your business’s tax return, including extensions. This makes it an excellent retroactive tax planning tool.
What is the deadline to open a Solo 401(k)?
To make employee elective deferrals for the current tax year, the Solo 401(k) plan must be established by December 31 of that year. However, you generally have until the tax filing deadline (including extensions) to actually deposit the employer profit-sharing contributions.
Can I contribute to a Solo 401(k) if I also have a W-2 job with a 401(k)?
Yes, but the employee elective deferral limit ($24,500 for 2026) applies across all 401(k) plans combined. If you max out your deferral at your W-2 job, you cannot make an employee deferral to your Solo 401(k). However, you can still make the employer profit-sharing contribution to the Solo 401(k) based on your self-employment income.
Do retirement contributions reduce my self-employment tax?
No. Contributions to a SEP IRA or Solo 401(k) reduce your income tax liability, but they do not reduce the net earnings subject to the 15.3% self-employment tax (Social Security and Medicare).
Can my spouse participate in my Solo 401(k)?
Yes. If your spouse earns income from the business, they can participate in the Solo 401(k), potentially doubling the family’s total contribution limits.
What is the difference between a traditional and a Roth Solo 401(k)?
A traditional Solo 401(k) is funded with pre-tax dollars, providing an immediate tax deduction, but withdrawals in retirement are taxed. A Roth Solo 401(k) is funded with after-tax dollars (no immediate deduction), but qualified withdrawals in retirement are tax-free.
Are there reporting requirements for a Solo 401(k)?
Yes. Once the total assets in your Solo 401(k) plan exceed $250,000 at the end of the plan year, you are required to file Form 5500-EZ annually with the IRS. SEP IRAs do not have this requirement.
Frequently Asked Questions
When profits swing, weigh timing flexibility and the ways contributions stack. A Solo 401(k) permits both employee deferrals and employer profit-sharing, which can let someone shelter more income at lower profit levels, but the plan document must be established by December 31 of the tax year to allow employee deferrals. A SEP IRA is administratively simpler and allows establishment and funding up to the business tax return due date, including extensions. In either case base calculations on net earnings from self-employment, not gross revenue, and account for self-employment tax in the contribution worksheet. For a final decision, reconcile profit estimates, consider entity structure effects, and obtain current official guidance or qualified review.
Yes — for a SEP IRA the rules in the source allow establishment and funding up to the due date of the business tax return, including extensions, so you can both set up a new SEP and make employer profit-sharing contributions for the prior tax year by that filing deadline. The draft gives a sole proprietor example: if you extend your individual return, the extended due date is the cutoff for prior-year SEP funding. That flexibility is a key difference from Solo 401(k) employee deferral timing, but confirm your specific filing calendar and consult current IRS instructions or a qualified reviewer before relying on the window.
To make employee elective deferrals for a given year, the Solo 401(k) plan document must be adopted by December 31 of that year. Once the plan exists, the employer profit-sharing and employee deferral amounts can generally be deposited up to the tax filing deadline, including extensions. If your business is an S or C corporation, employee deferrals are subject to an earlier deposit rule and generally must be deposited into the plan trust within a few days of the payroll date on which they were withheld. Check current plan and payroll guidance to align deposits with applicable payroll rules.
Deductible contributions to a traditional SEP or Solo 401(k) lower your taxable income and therefore federal income tax liability, which you should reflect when estimating quarterly payments on Form 1040-ES. However, these retirement contributions do not reduce the net profit used to calculate self-employment tax; you still owe Social Security and Medicare taxes on your full business profit before the retirement deduction. When projecting estimated taxes, reconcile net profit, plan deductions, and the unchanged self-employment tax base to determine how much the retirement deduction will reduce income tax and quarterly payment needs.
Begin with your business net profit and then subtract the deductible portion of self-employment tax to arrive at modified net earnings; the draft calls out that this deductible portion is typically half of the self-employment tax. For the employer profit-sharing calculation applicable to SEP IRAs and Solo 401(k)s, that adjustment effectively reduces the applicable percentage a sole proprietor can contribute—what appears as a 25% employer rate translates to a lower effective rate on modified net earnings. Use the IRS worksheet in Publication 560 to compute the exact amounts for your situation and seek qualified review if the math is material to your decision.
For S corporation owners, retirement contribution calculations are tied to W-2 wages, not the corporation’s pass-through profit. The business can make employer profit-sharing contributions based on the owner’s W-2 salary, and K-1 or pass-through profit cannot be used to compute retirement contributions. Consequently, if an owner intentionally keeps a low W-2 salary to lower payroll taxes, that choice will constrain the ability to make large deductible retirement contributions. Balancing payroll tax strategy against retirement deduction capacity typically requires a multi-year plan and a review of current tax guidance.
A common misconception is that SEPs accept employee salary deferrals; they do not. SEP IRAs are funded only through employer profit-sharing contributions, so you cannot make elective employee deferrals into a SEP. A Solo 401(k), by contrast, allows both elective deferrals and employer profit-sharing, enabling a combination strategy that can shelter more income at lower profit levels. That structural difference is central when deciding which plan type better fits your contribution goals and timing constraints.
Follow a repeatable calculation workflow: reconcile your business net profit after ordinary expenses, compute self-employment tax and identify the deductible portion to subtract from net profit to get modified net earnings, and then determine the employer profit-sharing contribution based on that modified figure. Separately assess how much you can defer as the employee under the Solo 401(k) elective-deferral rules for the year. Put the two pieces together to estimate total contributions, and use the IRS worksheet in Publication 560 to confirm. Because entity type and payroll timing rules can change the result, verify figures against current official instructions or qualified review before finalizing contributions.