Business owner tax planning

Retirement plans for business owners.

A Solo 401(k), SEP-IRA, or SIMPLE IRA can shelter $23,000–$70,000 from taxes each year. The right one depends on your entity structure, whether you have employees, and how much you want to contribute. Here’s how to decide.

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The tax angle

The deduction most owners leave on the table.

A retirement plan is one of the few places a business owner can take a large, above-the-line deduction that also builds personal wealth. A $66,000 Solo 401(k) contribution at a 35% effective rate is worth roughly $23,100 in taxes — this year.

Most owners who skip this aren’t avoiding retirement savings by choice. They either picked the wrong plan type early on and never revisited it, or they set up a plan without understanding how the contribution limit changes with their income.

The bigger miss: retirement plan design connects directly to your S-corp salary. How much you pay yourself in W-2 wages affects your employer match ceiling. The salary and the plan belong in the same conversation.

Solo 401(k) max (2025)

$70,000

Employee + employer contribution combined (age 50+: $77,500)

SEP-IRA max (2025)

$70,000

25% of W-2 wages or net self-employment income

Tax savings at 37% rate

$25,900

On a $70k contribution — real money, this year

Plan comparison

Three plans. One is usually right for your situation.

Each plan has a different contribution structure, deadline, and fit. The decision depends mostly on whether you have employees and whether you operate as an S-corp.

Solo 401(k)

Solo S-corp owners and self-employed with no employees

Limit: Up to $70,000 in 2025 ($77,500 if age 50+)

How it works: Employee elective deferral of up to $23,500 + employer profit-sharing contribution of up to 25% of W-2 wages

Setup deadline: Must be established by December 31

Works well when

Highest potential contribution of any plan type
Roth option available (after-tax contributions that grow tax-free)
Loan provisions available
Works especially well with S-corp salary structure

Watch out for

Only works if you have no full-time W-2 employees (other than a spouse)
Slightly more admin than SEP-IRA
Employer EIN required to open

SEP-IRA

Self-employed sole proprietors, single-member LLCs, or owners who want simplicity

Limit: Up to $70,000 in 2025 (25% of net self-employment income or W-2 wages)

How it works: Employer-only contributions — no employee deferral component

Setup deadline: Can be established and funded up to tax filing deadline (including extensions)

Works well when

Simplest to set up and maintain
Flexible — contribute as much or as little as you want each year
Late setup allowed (until tax filing deadline)
Works for sole proprietors and LLCs not yet electing S-corp

Watch out for

No Roth option
No employee deferral component — contribution ceiling depends entirely on income
If you have employees, you must contribute proportionally for them too
Lower effective contribution than Solo 401(k) at the same income level

SIMPLE IRA

Businesses with a small number of employees (up to 100)

Limit: $16,500 employee deferral in 2025 ($20,000 if age 50+) + required employer match

How it works: Employee salary deferral + mandatory employer contribution (either 3% match or 2% non-elective)

Setup deadline: Must be established by October 1 for the current year

Works well when

Works when you have W-2 employees
Lower admin burden than a full 401(k) plan
Employees value the benefit

Watch out for

Lower contribution limits than Solo 401(k) or SEP-IRA
Employer contributions are mandatory — no flexibility in lean years
2-year rule restricts rollovers for new participants
October 1 setup deadline is easy to miss

Which plan fits

Match your situation to the right plan.

Your situation

S-corp owner, no employees other than yourself

Solo 401(k)

The employee deferral component ($23,500) plus the employer match (up to 25% of your W-2) gets you to the highest total contribution. The Roth option is an added benefit most S-corp owners underutilize.

Your situation

Sole proprietor or single-member LLC, not yet an S-corp

SEP-IRA

Simpler to set up and can be opened until the tax filing deadline (including extensions). When your profit grows enough to justify an S-corp election, revisit — Solo 401(k) will likely outperform.

Your situation

S-corp with part-time contractors only (not W-2 employees)

Solo 401(k)

Contractors don't disqualify you for a Solo 401(k). Only W-2 employees with 1,000+ hours/year create the coverage issue.

Your situation

Owner-operated business with 2–10 full-time W-2 employees

SIMPLE IRA or SEP-IRA

If you contribute to a SEP-IRA you must contribute proportionally for all eligible employees. SIMPLE IRA has a mandatory match but lower limits. A full 401(k) plan becomes worth it once you're past about 15 employees.

Free calculator

See your exact contribution limit and tax savings.

Enter your net self-employment income or W-2 salary, pick a plan type, and see the maximum deductible contribution and after-tax cost — across Solo 401(k), SEP-IRA, and SIMPLE IRA.

Open the retirement calculator

Deadlines

When you need to act.

The most common mistake is wanting to open a Solo 401(k) in January for the prior year. You can fund it late — but the plan must have been established before December 31.

Plan	Establish by	Fund by	Key note
Solo 401(k)	December 31 of the tax year	Tax filing deadline including extensions (Oct 15 for individuals)	The plan must exist by Dec 31 — but you can make the contribution after year-end if the plan is already open.
SEP-IRA	Tax filing deadline including extensions	Same as establishment — up to Oct 15 with extension	Most flexible deadline of the three. You can open and fund a SEP-IRA while preparing your return.
SIMPLE IRA	October 1 of the plan's first year	Ongoing — salary deferrals each pay period, employer match by Jan 30 of following year	The October 1 deadline catches owners off guard. If you missed it, the plan starts next year.

Common mistakes

Where owners leave money behind.

Setting the S-corp salary without looking at the retirement plan

Your employer match ceiling is 25% of your W-2 wages. A $60k salary caps your employer contribution at $15k. A $100k salary raises it to $25k. The salary and the plan belong in the same optimization.

Missing the December 31 Solo 401(k) deadline

The plan must be open before the year ends, even if you don't fund it until April or October. Setting this up in January for the prior year isn't possible. October is the right time to make this decision.

Keeping a SEP-IRA after switching to an S-corp

A SEP-IRA is often the right starting point for a sole proprietor. Once you elect S-corp status, the contribution ceiling changes — and a Solo 401(k) usually wins at the same income level because of the employee deferral component.

Skipping Roth conversions inside the Solo 401(k)

Many Solo 401(k) providers allow a Roth designation on employee deferrals. Contributing after-tax now and letting it grow tax-free is valuable in years when your marginal rate is lower than you expect in retirement.

Not coordinating the contribution with estimated taxes

A large retirement contribution changes your Q4 estimate. If your CPA doesn't know about a $50k contribution before the January 15 deadline, you'll over-pay and wait for a refund — or under-pay and owe a penalty.

Common questions

What owners usually ask first.

Can I have both a Solo 401(k) and a SEP-IRA?

Generally no — once you have a Solo 401(k), you can't also fund a SEP-IRA for the same self-employment income in the same year. You choose one or the other. If you have multiple businesses, it gets more complex and depends on whether those businesses are related.

What if I have both an S-corp W-2 and some 1099 self-employment income?

You can participate in a Solo 401(k) through the S-corp for your W-2 wages. Self-employment income from a separate sole proprietorship may also contribute to a Solo 401(k) — but the combined limits still apply across both. This is a situation where the details matter and coordination with a CPA is worth the time.

How does the Solo 401(k) interact with my S-corp salary?

Your employee deferral (up to $23,500 in 2025) can come from your W-2. Your employer profit-sharing contribution is limited to 25% of your W-2 wages. That's why salary calibration and retirement plan design go together — adjusting the salary affects the contribution ceiling.

When should I switch from a SEP-IRA to a Solo 401(k)?

Usually when the SEP-IRA contribution ceiling starts being a binding constraint — which happens when the Solo 401(k) employee deferral component would let you contribute more. For most S-corp owners, this happens somewhere between $80k–$120k in W-2 wages. The Retirement Contribution Maximizer tool lets you model both.

Is the Solo 401(k) contribution actually deductible?

Yes, for the traditional (pre-tax) version. Employee deferrals reduce your W-2 taxable wages, and employer contributions are deductible on the business return (1120-S or Schedule C). The deduction flows through to your personal return and reduces your AGI.

What brokerage should I use for a Solo 401(k)?

Fidelity, Vanguard, and Schwab all offer self-directed Solo 401(k) plans with no annual fees and a wide investment selection. Fidelity allows after-tax (Roth) contributions; Vanguard currently does not. For most owners, any of the three works well — the plan design matters more than the custodian.

Work with Matt

Ready to build a plan?

Matt Reese, CPA helps business owners select and fund the right retirement plan — coordinated with their S-corp salary, distributions, and personal tax picture.

Talk with Matt Business owner tax planning

Tax services provided through Matt Reese, CPA. This page is educational and does not constitute tax or investment advice.