Solo 401(k) Guide: Contribution Limits, Eligibility, and Setup for Owners Without Employees

For owners without employees, the solo 401(k) is often the most powerful everyday retirement tool available. The reason is its two-part structure: you can contribute a salary deferral as the employee and an employer contribution as the business. That lets a high earner shelter a large amount, and lets a lower earner shelter a large percentage of income.

Who is eligible

A solo 401(k) (also called an individual 401(k) or one-participant 401(k)) is designed for a business with no employees other than the owner and the owner's spouse. Eligible businesses include sole proprietorships, single-member LLCs, partnerships, S-corporations, and C-corporations, provided the only participants are the owner(s) and spouses. Part-time employees who work fewer than 1,000 hours a year may be excluded from participation under the plan terms in some cases, but they can affect coverage requirements, so consult a plan provider. Rules for long-term part-time employees were expanded in recent years, so confirm.

If you hire employees who become eligible, the plan becomes a regular 401(k) with additional testing and administration. See retirement plans for S-corp owners and SIMPLE IRA guide for alternatives with employees.

The two contribution types

Employee elective deferrals. You can defer a portion of your compensation, up to an annual dollar limit. For 2025 the limit was $23,500, with an additional catch-up contribution of $7,500 for those age 50 and older, and a higher catch-up amount for those age 60 to 63 under recent legislation. These limits are indexed and change most years, so confirm the current figures. Deferrals cannot exceed your compensation. Deferrals can be pre-tax or Roth if the plan allows.

Employer profit-sharing contributions. The business contributes on your behalf, subject to limits based on compensation:

For S-corp or C-corp owners: up to 25 percent of W-2 compensation (excluding the employer contribution itself and, generally, pre-tax deferrals reduce the base for the computation in the manner defined by the plan).
For sole proprietors and partners: generally up to about 20 percent of net earnings from self-employment, computed after deducting one-half of self-employment tax and the contribution itself (through a special calculation).

Overall limit. Total contributions from both sources cannot exceed the annual defined contribution limit, which for 2025 was $70,000 (not counting catch-up contributions), subject to the compensation cap for plan purposes (which was $350,000 for 2025). Again, these figures adjust annually.

A conceptual example

Consider two owners of similar age with the same business profit. One is a sole proprietor with $100,000 of net self-employment earnings. The other is an S-corp owner with $100,000 of W-2 wages. Each can defer up to the employee limit, and each can add an employer contribution. The S-corp owner's employer contribution is based on W-2 wages (25 percent), while the sole proprietor's is based on net earnings after adjustments (effectively about 20 percent). The results differ and depend on the exact calculation, so run the numbers with software or an adviser. The structure means that an owner with modest income can still contribute a large percentage of pay through deferrals alone.

Why S-corp salary matters

For S-corp owners, only W-2 wages count as compensation for the plan. Distributions do not. A very low salary limits both deferrals and employer contributions. So the salary decision has retirement consequences as well as payroll tax consequences. Balancing the two is part of planning. See S-corp reasonable compensation and setting your owner salary in an S-corp.

Deadlines

Plan adoption: the plan generally must be established by the end of the tax year for which you want to make employee deferrals. Recent legislation allows sole proprietors (with no employees) to adopt a new plan and make employee contributions up to the filing deadline for the year of adoption. Check current rules. Employer contributions can generally be made up to the business's tax return due date, including extensions.
Employee deferrals for S-corp and C-corp owners: must be elected and generally withheld from pay during the year, since they are payroll deferrals. They must be deposited timely.
Employer contributions: by the return due date including extensions for deduction purposes.
Form 5500-EZ: required once plan assets exceed a threshold (historically $250,000) at year end, and in the final year of the plan. Failing to file can bring penalties.

Roth solo 401(k)

Many providers allow Roth deferrals, where you pay tax now and withdraw qualified distributions tax-free later. Recent legislation also allows Roth treatment of employer contributions if the plan permits. Whether Roth or pre-tax makes sense depends on your current and expected future tax rates and other factors.

Loans

Many solo 401(k) plans permit participant loans, up to a limit, repayable over a stated period. Not all providers offer this, and loans have rules and risks. Consider whether you want the flexibility.

Setting up the plan

Confirm eligibility and decide the objectives (pre-tax, Roth, loan feature).
Choose a provider (brokerage, bank, or third-party administrator) that offers an IRS-pre-approved plan document and supports your desired features.
Adopt the plan document and complete the adoption agreement.
Obtain the plan's EIN if required (a plan generally does not need its own EIN if there are no employees, but many providers require one for the trust account; ask).
Open the trust account.
Establish contribution procedures: payroll deferrals for S-corp owners, or estimated contributions for sole proprietors.
Set up recordkeeping for contributions and compliance.
Track deadlines for contributions and Form 5500-EZ.

Investing

Investments are chosen by you within the provider's platform. Fees, investment menus, and service quality vary. Compare costs, especially if you have a small balance.

Spouses

A spouse who works in the business can participate, potentially doubling household contributions. The spouse must have real compensation from the business. See hiring family members.

Combining plans

If you participate in another employer's 401(k) elsewhere, the employee deferral limit applies across plans. Employer contributions are calculated separately for each unrelated employer. Owners with multiple businesses should be careful about controlled group rules, which can require aggregating employees. Discuss with a plan professional.

Common mistakes

Missing the plan adoption deadline for employee deferrals.
Overcontributing by ignoring the aggregate deferral limit or the overall limit.
Miscalculating employer contributions for sole proprietors.
Not filing Form 5500-EZ when required.
Hiring an employee without reviewing plan consequences.
Contributing to the plan from S-corp distributions. Contributions are based on wages.
Confusing owner deferrals with employer deductions on the return.
Not depositing S-corp deferrals timely.
Using a plan provider that does not offer needed features and having to move later.

Deduction reporting

For sole proprietors and partners, the contribution is generally deducted on the personal return (Schedule 1) as a self-employed retirement contribution. For S-corp and C-corp owners, employer contributions are deducted by the company, and employee deferrals are reported in W-2 wages (Box 12) but excluded from taxable wages if pre-tax. See S-corp tax return guide.

If you want help projecting the best contribution mix for your entity and income, AE Tax Advisors can assist, and a discovery call is a good first step. Plan documents and administration are best handled with a qualified plan provider.