Solo 401(k) Mechanics for One-Person Businesses

If you are self-employed with no employees other than a spouse, the Solo 401(k) is the largest pre-tax retirement vehicle you can use. It carries the same $23,500 employee deferral as a corporate 401(k) plus an employer profit-sharing component that pushes the total to $70,000 — and a $7,500 (or $11,250) catch-up on top.

The two contribution sources

• Employee deferral: up to $23,500 (2025), plus $7,500 catch-up at age 50, plus $11,250 super catch-up at ages 60–63 (replacing the $7,500). Can be pre-tax or Roth. Counts against the §402(g) elective deferral cap shared with any other 401(k)/403(b).
• Employer profit-sharing: up to 25% of W-2 compensation (for an S-Corp owner) or ~20% of net SE earnings (for a sole prop). Always pre-tax. Plus, post-SECURE 2.0, can be Roth if the plan permits.

Combined cap (employee deferral + employer profit-sharing): the §415(c) $70,000 annual additions limit. Plus the catch-up sits on top.

Maximum 2025 contributions by age and structure

"Full income" means enough self-employment earnings to support the full profit-sharing component. For a sole prop, that is roughly $230,000 of net SE earnings; for an S-Corp owner, $186,000 of W-2 wages.

The Roth Solo 401(k)

SECURE 2.0 §604 (effective 2023) allows the employer profit-sharing piece to be designated Roth. Combined with the always-available Roth employee deferral, this means a Solo 401(k) can be 100% Roth — up to $70,000+ of after-tax dollars flowing into tax-free growth annually. The employer Roth contribution is taxable as ordinary income to the participant in the year contributed.

The loan provision

Solo 401(k) plans can permit participant loans up to the lesser of $50,000 or 50% of the vested balance, under IRC §72(p). Repayment must be amortized over 5 years (longer for a primary residence) at a market interest rate. Interest is paid back to the participant's own account — but it is paid with after-tax dollars, then taxed again on withdrawal, so the "paying interest to yourself" benefit is partially illusory.

The employee-disqualification rule

The Solo 401(k) is technically a regular §401(k) qualified plan; it just gets streamlined administration when the only participants are owners and spouses. Hire one non-spouse, non-owner employee who works 1,000 hours in a year — or, under SECURE 2.0's expanded long-term part-time rules, 500 hours over two consecutive years — and the plan must be brought into full ERISA compliance with nondiscrimination testing, Form 5500 filing, and the works.

At that point most owners convert to a traditional 401(k). The Solo 401(k) is best understood as a temporary vehicle for businesses that will stay sub-employee or transition to a different structure on hire.

Form 5500-EZ filing

Solo 401(k) plans must file Form 5500-EZ once total plan assets exceed $250,000 at year-end, or in the final year before termination. Below $250,000, no annual filing. Missing the form once you cross the threshold triggers escalating penalties — the IRS has a relief program for first-time late filers under Rev. Proc. 2015-32.

Common mistakes

• Calculating profit-sharing on gross self-employment income. The formula uses net SE earnings minus half of SE tax. Subtracting that first is essential.
• Stacking on top of a corporate 401(k) deferral. The $23,500 employee deferral cap is per-person, across all 401(k)s. Two jobs, one cap.
• Missing the December 31 deadline for SOC 401(k) establishment. The plan must be in place by December 31 to make any employee deferrals for the year (sole props get a slightly later deadline under SECURE 2.0 §317 to set up the employer-only side).
• Forgetting Form 5500-EZ at $250,000. Easy to miss; penalties stack quickly.

Sources

• Internal Revenue Code §401(k) and §401(c), Solo 401(k) authority (Cornell LII): law.cornell.edu/uscode/text/26/401
• Internal Revenue Code §72(p), participant loans: law.cornell.edu/uscode/text/26/72
• SECURE 2.0 Act §604 (Roth employer contributions) and §317 (sole-prop plan timing), Pub. L. 117-328: congress.gov/bill/117th-congress/house-bill/2617
• IRS Publication 560, Retirement Plans for Small Business: irs.gov/forms-pubs/about-publication-560
• IRS Form 5500-EZ instructions: irs.gov/forms-pubs/about-form-5500-ez
• IRS Revenue Procedure 2015-32, late 5500-EZ filing relief: irs.gov/pub/irs-drop/rp-15-32.pdf

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