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How the Self-Employed Can Save Up to $70,000 from Taxes with a Solo 401k

By Stuart Robertson

The self-employed that have a Solo 401(k) plan have a powerful tool to lower this year’s taxes and save a lot for retirement too. The 2025 contribution limits for those under 50 years old is up to $70,000 in Solo 401(k) plan, up from $69,000 in 2024. That can truly lower your taxes and perhaps lower your tax bracket too.

If you are 50 year of age or more, you put in up to $77,500 due to the catch up contribution. And now in 2025, if you 60-63 years of age there is a “super catch-up” of $11,250, which means this Solo 401(k) users could potentially put away up to 81,250 in 2025. Wow!

You might have thought the contribution limit for a 401(k) is $23,500 in 2025. That’s true for the amount an employee can contribute to their 401(k) account. Employers can contribute too. As a self-employed person and owner of your business, you are both the employee and employer. This means you can add employer contributions, often via Profit Sharing, up to the limit, assuming your earnings enable you to max it out.

How to Determine the Amount You Can Contribute as an Employer?
The calculation to determine how much you put into your 401(k) is based on two key variables: 1) how much you have contributed as an employee, 2) your business entity type.

The type of entity you formed will be important in determining this calculation. If your business is structured as a corporation, you can make employer contributions up to 25% of W-2 earnings into the 401(k) plan. If you’re a sole proprietor, single member LLC, or partnership, this percentage may be around 20% based on your net schedule C. The IRS has a publication and worksheet that's fairly simple to follow. However, there are calculators like this one to help you quickly consider what the amount is likely to be. You’ll want to talk to your tax advisor before determining the final number.

Just keep in mind, if you are figuring this out for the 2024 tax year, that total contributions as an employer and employee cannot exceed a combined total of $69,000 ($76,500 if you’re over 50 years of age and you maxed your employee “catch-up” contribution).

An Example of How to Lower Your Taxes by $12,075 or More with Solo 401(k) Contributions
The amount you can tax defer will vary by your earnings and your tax rate. Here’s a hypothetical example of a 45 year old sole proprietor. Let’s assume her earnings are $200,000 and she has already contributed $23,000 to her 401(k) as an employee. As an employer, she can make additional employer contributions of $37,374 for a total of $60,374. This will lower her taxes by $12,075 assuming an effective tax rate of 20% versus a person that doesn’t contribute to a retirement plan at all.

Example Solo 401(k) Saving and Tax Calculation Comparison
With 401(k) Contributions Without a 401(k)
Earnings $200,000 $200,000
Employee Contribution $23,000 $0
Max Employer Contribution (Sole Proprietor) $37,374 $0
Taxable Income $139,626 $200,000
Taxes Owed (20% Effective Tax Rate) $27,925 $40,000

The owner that contributed to their Solo 401(k) paid $12,925 less in taxes this year while saving $60,374 towards retirement. In actuality, the tax savings could be even greater as the 401(k) contribution may also drop the owner a tax bracket and/or lower the effective tax rate more than a person who doesn’t use a tax advantaged account. Remember, this is a simple example and not meant as tax advice. When 401(k) monies are withdrawn in retirement, it will be taxed with the exception of any “employee” Roth 401(k) savings. It’s a good idea to consult a tax advisor to discuss your specific situation including other deductions you may qualify for.

A Smart Approach to Contributing to a Solo 401(k)
Again, since you’re both an employer and employee when it comes to your Solo 401(k) plan, the smart moves are to contribute a preset monthly amount as an “employee” that fit your budget during the calendar year, and then after year-end, review your situation and make a one-time, employer contribution that best balances your tax saving needs with your retirement savings goals before the filing deadline.

You Will Have Until Your Tax Deadline for Employer Contributions (and may for Employee contributions too)
Your business entity type will determine when your tax deadline is for employee and employer contributions -- they can differ. Entities formed as S-Corps or Partnerships typically have until March 15th deadline for employer contributions, and all other entity types like Single Member LLCs and Sole Proprietors will have April 15th deadline. For employee and employer contribution deadlines, just review the chart in our Solo 401(k) Contributions Deadlines article.

Takeaways:

  • In a Solo 401(k) plan, the self-employed are both the employee and employer, so are able to contribute as both up to the $70,000 total limit allowed in 2025 ($69,000 in 2024).
  • Those that are 50 years or older may also contribute even more with the catch-up contributions allowed.
  • How much you can contribute as the employer is based on your business entity type and how much you have put in as an employee. A Solo 401(k) calculator can help you determine how much you can contribute as the employer.
  • Deadlines for current year contributions will vary based on your entity type for the last day to make employee and employer contributions to your plan. These dates may be different based on your business entity. Typically, your tax deadline (4/15 for sole proprietors) is the last date you may contribute.
  • The Solo 401(k) can help the self-employed contribute a large amount towards retirement while lowering taxes for the current year. It may even lower your tax bracket and effective tax rate significantly.

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.