Self Employed 401k Contribution Limits
Understand the mechanics of a Solo 401(k) for the self-employed. This guide clarifies how your dual role as employee and employer affects your contribution limit.
A Self-Employed 401(k), also known as a Solo or Individual 401(k), is a retirement plan for business owners with no employees other than a spouse. This plan is available to freelancers, independent contractors, and sole proprietors, allowing them to establish a retirement plan similar to a traditional 401(k). The plan is designed for the business owner and their spouse, provided both earn income from the business. Its primary function is to enable significant, tax-advantaged retirement savings for those without access to an employer-sponsored option.
The Two Hats of Self Employed Contributions
A feature of the Self-Employed 401(k) is that the owner contributes in two capacities: as the “employee” and the “employer.” This dual-contribution structure allows for the plan’s high contribution potential. Each role has its own set of rules and contribution types that work together within the plan.
The first role is the employee, where contributions are called elective deferrals. As the employee, the individual defers a portion of their compensation into the plan. These contributions can be designated as pre-tax to reduce current taxable income, or as post-tax Roth contributions for tax-free qualified distributions in retirement.
The second role is the employer, where the business makes a profit-sharing contribution. This contribution is made on behalf of the participant and is always pre-tax. These employer contributions act as a business expense, providing a tax deduction for the business.
Calculating Your Maximum Contribution Limit
For 2025, the total combined employee and employer contributions cannot exceed $70,000. This overall cap does not include any catch-up amounts. Reaching this maximum depends on your income and how you structure your contributions.
As an “employee,” you can contribute up to 100% of your compensation, but no more than the annual elective deferral limit of $23,500 for the 2025 tax year. You can contribute this full amount as long as your earned income is at least equal to your contribution.
The “employer” contribution is based on business performance. While the official contribution rate is 25% of compensation, the calculation for sole proprietors and single-member LLCs results in an effective rate of 20% of net adjusted self-employment income. This percentage-based contribution is in addition to the employee deferral.
To calculate the employer portion, you first need your net adjusted self-employment income. Start with your gross self-employment income and subtract business expenses to find your net profit, which is found on Line 31 of Schedule C. From this net profit, subtract one-half of your self-employment tax. The result is the earnings base for the employer contribution.
For example, a sole proprietor under age 50 with $125,000 in net profit would first calculate one-half of their self-employment tax, which is approximately $8,831. Subtracting this from the net profit leaves a net adjusted self-employment income of $116,169. The maximum employer contribution is 20% of this amount, or $23,233. This person could also make the maximum employee contribution of $23,500, for a total 2025 contribution of $46,733.
Individuals age 50 and over can make additional catch-up contributions. For 2025, the standard catch-up is $7,500. A higher catch-up limit of $11,250 is available for individuals aged 60, 61, 62, and 63. Using the previous example, a 55-year-old could add the $7,500 catch-up for a total contribution of $54,233. A 62-year-old could add the $11,250 catch-up for a total contribution of $58,233.
Contribution Deadlines and Key Rules
The deadline to formally establish a Self-Employed 401(k) is December 31 for it to be effective for that tax year. While the plan must be adopted by the end of the year, the funding of contributions can happen later.
Contribution deadlines vary by business structure. For S-corporations and partnerships, employee elective deferrals must be elected by December 31. However, for sole proprietorships, the employee contribution can be made up until the business’s tax filing deadline, which is April 15 of the following year, or later if an extension is filed.
The employer profit-sharing contribution for all business types can be made up until the business’s tax filing deadline for that year, including any extensions. This allows business owners to determine the contribution amount after their annual profitability is clear. For a sole proprietorship with a tax filing extension, this could be as late as October 15.
Contributing more than the allowable limit for the year results in an excess contribution. This amount must be withdrawn by the tax filing deadline to avoid a 6% excise tax on the excess amount.