Are Solo 401k Contributions Tax Deductible?

A Solo 401(k) is a retirement plan designed for self-employed individuals and small business owners with no full-time employees other than themselves or their spouse. Contributions made to a traditional Solo 401(k) are tax-deductible, which can reduce an individual’s taxable income. It allows for both employee and employer contributions.

Who Can Establish a Solo 401(k)

A Solo 401(k) is for individuals who generate self-employment income, including sole proprietors, independent contractors, freelancers, and owners of small businesses structured as partnerships or LLCs. A requirement for establishing a Solo 401(k) is the absence of full-time employees, defined as those working over 1,000 hours per year, excluding the business owner and their spouse. If a spouse is actively employed by the business, they may also participate.

The business activity must be an active endeavor with the intent to generate profit, rather than passive income like rental income or K-1 distributions. Even if an individual has a full-time job with an employer-sponsored 401(k), they can still establish and contribute to a Solo 401(k) based on their self-employment income.

Types of Solo 401(k) Contributions

A Solo 401(k) allows the business owner to make contributions in two capacities: as an employee and as an employer. The employee contribution, or elective deferral, is a portion of your self-employment income. This can be made as either a pre-tax (traditional) contribution or a Roth (after-tax) contribution. Pre-tax contributions are relevant for immediate tax deductibility, while Roth contributions are not.

The employer contribution is a profit-sharing contribution made by the business on behalf of the owner. This contribution is typically pre-tax, though Roth employer contributions are now allowed.

How Contributions Become Tax Deductible

Contributions to a traditional Solo 401(k) are tax-deductible, offering a direct reduction in taxable income. Pre-tax employee contributions directly lower your individual taxable income for the year they are made.

Employer contributions are treated as a business expense. For incorporated businesses (S-corporations or C-corporations), these contributions reduce the business’s taxable profit. For sole proprietors or single-member LLCs, employer contributions reduce your net earnings from self-employment, which lowers your personal taxable income.

Roth contributions, both employee and employer, are funded with after-tax dollars. These contributions do not offer an upfront tax deduction. The benefit of Roth contributions is that qualified withdrawals in retirement, including earnings, are entirely tax-free.

Solo 401(k) Contribution Limits

Annual contribution limits apply to combined employee and employer contributions. For 2024, the employee elective deferral limit is $23,000. Individuals aged 50 and older can contribute an additional catch-up contribution of $7,500 for 2024, bringing their total employee contribution to $30,500. For 2025, the employee deferral limit increases to $23,500, with the catch-up contribution remaining at $7,500 for those 50 and over, and a higher catch-up of $11,250 for those aged 60-63.

Employer profit-sharing contributions are limited to 25% of the business owner’s compensation. For sole proprietorships and single-member LLCs, this is calculated as 20% of net earnings from self-employment after deducting one-half of self-employment taxes. The combined total of employee and employer contributions cannot exceed an overall limit, which is $69,000 for 2024 and $70,000 for 2025. This overall limit increases to $76,500 for 2024 and $77,500 for 2025 for those aged 50 and over due to catch-up contributions.

Claiming Your Solo 401(k) Deduction

Claiming the Solo 401(k) deduction depends on your business structure. For sole proprietorships and single-member LLCs, both employee and employer contributions are reported on your personal tax return. You will use Schedule C to calculate your net earnings from self-employment. The deductible contributions are then reported on Schedule 1 (Form 1040), on Line 16, labeled “Self-employed SEP, SIMPLE, and qualified plans.” This amount is then carried to your Form 1040, reducing your adjusted gross income.

For incorporated businesses (S-corporations or C-corporations), the reporting process differs. Employee contributions are reported on your W-2. Employer contributions are claimed as a business expense on the corporation’s tax return; for a C-corporation, this is Form 1120, and for an S-corporation, it is Form 1120-S. If your Solo 401(k) plan assets exceed $250,000 at year-end, you must also file Form 5500-EZ with the IRS.