Table of Contents

• Step 1: Know the 2026 Solo 401(k) Contribution Limits
  • Employee Elective Deferral Limits and Catch-Up Contributions
  • Employer Profit-Sharing Contribution Limits
• Step 2: Calculate Earned Income as a Sole Proprietor
  • Four Different Numbers That All Get Called “Income”
  • The Deduction Adjustment, Step by Step
  • Why the Employer Rate Looks Like 20%, Not 25%
  • What Counts and What Does Not
• Step 3: Work Through Solo 401(k) Contribution Examples
  • Example 1: Sole Proprietor, $150,000 Net Profit, Age 45
  • Example 2: Sole Proprietor, $400,000 Net Profit, Age 55
  • Example 3: S Corporation Owner-Employee, $120,000 W-2 Wages, Age 45
  • Example 4: Partnership Member
  • The Order of Operations That Never Changes
• Step 4: Use a Solo 401(k) Contribution Calculator to Check Your Work
• Step 5: Compare Solo 401(k) and Regular 401(k) Contribution Limits
• Step 6: Meet the Solo 401(k) Contribution Deadline and Avoid Excess Contributions
• Frequently Asked Questions

Last Updated: October 12, 2026

Step 1: Know the 2026 Solo 401(k) Contribution Limits

Learning how solo 401k limits work starts with two numbers: what you can defer from pay, and what the business can add on top. At Simonsgroup, we build retirement contributions into a client’s tax plan before the year closes, not after, because the structure you choose changes what you can put away.

The IRS publishes these limits each year in IRS retirement plan contribution guidance. For 2026, the employee side and the employer side each have their own ceiling.

Employee Elective Deferral Limits and Catch-Up Contributions

The employee elective deferral is the portion you choose to withhold from earned income. For 2026, that limit is $24,500. If you are age 50 or older, a catch-up contribution lets you add $8,000 more. Savers between ages 60 and 63 get a larger catch-up amount under the current rules.

These are tax-deferred contributions in most cases. Roth contributions are also allowed if your plan document permits them.

Employer Profit-Sharing Contribution Limits

The employer contribution is separate from your deferral. It is capped at 25% of compensation for a corporation and, for a sole proprietor, one-half of adjusted net earnings. The combined employee and employer total cannot exceed the annual additions limit, which is $72,000 for 2026, or $80,000 for those eligible for the age 50 catch-up.

Component	2026 Limit	Who It Applies To
Employee elective deferral	$24,500	Anyone with earned income
Catch-up (age 50+)	$8,000	Savers 50 and older
Employer profit-sharing	25% of compensation	Business contribution
Combined annual additions	$72,000	All contributions

Step 2: Calculate Earned Income as a Sole Proprietor

For a sole proprietor, the contribution calculation starts with net earnings from self-employment, not gross revenue and not business profit. This is where most people get it wrong, and it is the single biggest reason a solo 401(k) contribution comes out lower than expected.

Four Different Numbers That All Get Called “Income”

The confusion starts with vocabulary. Four separate figures get used in the same conversation, and only one of them belongs in the contribution formula.

• Business profit. Revenue minus ordinary business expenses. This is the number on the bottom of your Schedule C. It is not plan compensation.
• Net earnings from self-employment. Business profit minus the deductible half of self-employment tax. This is the starting point for the employer contribution.
• Plan compensation. For a sole proprietor, this is net earnings from self-employment after the deduction adjustment. For an S corporation owner-employee, it is W-2 wages. Same plan, different definition.
• Adjusted net earnings. Net earnings from self-employment reduced by the employer contribution itself. This is the figure the 25% rate is actually applied against, which is why the effective rate lands near 20% of profit.

The Deduction Adjustment, Step by Step

Self-employment tax is calculated on net earnings from self-employment. You are allowed to deduct one-half of that tax before arriving at the income used for the plan. That deduction is not optional and it is not a rounding detail. On a $150,000 profit it moves the employer contribution by thousands of dollars.

The sequence looks like this:

1. Start with business profit from Schedule C.
2. Multiply by 92.35% to arrive at net earnings from self-employment. The 92.35% factor reflects the portion of self-employment tax that is deductible.
3. Compute self-employment tax on that amount. For 2026, the Social Security wage base is $184,500, and the Medicare portion has no ceiling.
4. Divide the self-employment tax by two. That is your deduction.
5. Subtract the deduction from net earnings from self-employment. The result is your plan compensation base.

Why the Employer Rate Looks Like 20%, Not 25%

The employer contribution is capped at 25% of compensation. But the contribution itself reduces the compensation it is calculated from, so the algebra solves to a lower effective rate on profit. The practical shortcut most practitioners use is 20% of net earnings from self-employment after the deduction adjustment. That is not a different rule. It is the same 25% rate after the circular calculation is resolved.

What Counts and What Does Not

Only earned income supports a contribution. Rental income from a property you do not materially participate in, dividends, capital gains, and most partnership distributions for limited partners do not count. If your profit comes mostly from those sources, your contribution capacity is smaller than your tax return suggests.

A second trap: retirement plan contributions for your own account are deducted on your personal return, not on Schedule C. They do not reduce the business profit that feeds the calculation. If you subtract them twice, you will understate what you can contribute.

Step 3: Work Through Solo 401(k) Contribution Examples

The calculation path depends on your business structure. Below are three worked examples with real numbers so you can follow the arithmetic and reproduce it with your own figures. Each one assumes the 2026 limits: $24,500 employee deferral, $8,000 catch-up at age 50 and older, and a $72,000 annual additions cap.

Example 1: Sole Proprietor, $150,000 Net Profit, Age 45

Start with the profit and work down.

1. Business profit: $150,000.
2. Net earnings from self-employment: $150,000 x 92.35% = $138,525.
3. Self-employment tax: the Social Security portion applies to $138,525 (below the $184,500 wage base), and the Medicare portion applies to the full amount. The combined tax comes to roughly $21,195.
4. Deductible half: $21,195 / 2 = $10,598.
5. Plan compensation base: $138,525 – $10,598 = $127,927.
6. Employer contribution at 25% of the base: $31,982.
7. Employee deferral: $24,500.
8. Combined: $56,482, which is under the $72,000 cap, so nothing gets trimmed.

Notice that the employer piece is about 21% of the original $150,000 profit, not 25%. That gap is the deduction adjustment doing its work.

Example 2: Sole Proprietor, $400,000 Net Profit, Age 55

At higher profit levels the annual additions cap becomes the binding constraint.

1. Business profit: $400,000.
2. Net earnings from self-employment: $400,000 x 92.35% = $369,400.
3. Self-employment tax: Social Security applies only up to the $184,500 wage base, and Medicare applies to the full $369,400. The combined tax is roughly $24,800.
4. Deductible half: about $12,400.
5. Plan compensation base: $369,400 – $12,400 = $357,000.
6. Employer contribution at 25%: $89,250. That exceeds the cap on its own.
7. Employee deferral: $24,500, plus $8,000 catch-up at age 55.
8. The annual additions cap is $72,000 plus the $8,000 catch-up, so $80,000 total. The employer piece is reduced to bring the total to $80,000, which means an employer contribution of $47,500.

The lesson: once profit clears roughly $300,000, the cap controls the answer, not the 25% rate.

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Example 3: S Corporation Owner-Employee, $120,000 W-2 Wages, Age 45

Here compensation is W-2 wages, not profit. The corporation’s profit after your wages is irrelevant to the calculation.

1. W-2 wages: $120,000.
2. Employer contribution at 25% of wages: $30,000.
3. Employee deferral: $24,500.
4. Combined: $54,500, under the $72,000 cap.

Now change one input. If you set your W-2 wages at $60,000 instead, the employer contribution drops to $15,000 and the combined total falls to $39,500. Reasonable compensation is not just a payroll tax question. It directly sets your retirement contribution ceiling.

Example 4: Partnership Member

A general partner in a partnership is treated much like a sole proprietor. The partner’s share of ordinary business income flows to Schedule K-1, and the same self-employment tax adjustment applies. The calculation mirrors Example 1 using the partner’s distributive share in place of Schedule C profit.

A limited partner is different. Limited partners generally do not pay self-employment tax on their distributive share, and that share is generally not treated as earned income for plan purposes.

The Order of Operations That Never Changes

Across all four examples, the sequence is the same. Determine earned income first. Apply the self-employment tax deduction if you are not a W-2 employee. Calculate the employer piece. Add the employee deferral. Then check the annual additions cap and trim the employer piece if the total exceeds it. A contribution calculator runs this same sequence, which is why doing it by hand once makes the output trustworthy.

Step 4: Use a Solo 401(k) Contribution Calculator to Check Your Work

A solo 401(k) contribution calculator is a fast way to confirm your solo 401k limits, but it only works if you feed it the right inputs. Enter net earnings from self-employment, not gross profit. Enter your age for the catch-up rules. Enter your business structure.

Use the calculator as a check, not a replacement for understanding the steps. If the number surprises you, walk back through the earned income adjustment.

Step 5: Compare Solo 401(k) and Regular 401(k) Contribution Limits

The solo 401(k) and regular 401(k) contribution limits share the same employee deferral ceiling, but the employer side works differently. A regular plan may cap employer matches by formula. A solo plan lets you contribute as both employer and employee, which is why the combined maximum is often higher for a one-person business.

If you also work for another employer with a 401(k), your elective deferral limit is shared across both plans. Coordination matters here. The employer contributions do not share that same employee cap.

Step 6: Meet the Solo 401(k) Contribution Deadline and Avoid Excess Contributions

The solo 401(k) contribution deadline for the employer piece is your business tax filing deadline, including extensions.

Excess contributions happen when you exceed the annual limit or miscalculate earned income. The fix depends on timing, so catch it early.

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A solo 401(k) rewards planning, not last-minute scrambling. If the calculation feels like guesswork, that is usually a sign the structure underneath it needs attention.

This is not tax advice. Consult your tax advisor for guidance on your specific situation.

Frequently Asked Questions

Can I contribute 100% of my salary to a Solo 401(k)?

No. Your total Solo 401(k) contributions cannot exceed your earned income or the annual additions limit, whichever is lower. For 2026, the total cap is $72,000, or $80,000 if you are 50 or older. As a sole proprietor, your employer profit-sharing portion is limited to roughly 20% of net earnings after the deductible half of self-employment tax, so 100% of profit is never possible. As an S corporation owner, you can defer up to 100% of W-2 wages as an employee, but the employer piece is still capped at 25% of compensation.

How do I calculate Solo 401(k) contributions as a sole proprietor?

Start with your net profit from Schedule C. Subtract the deductible half of self-employment tax to get adjusted net earnings. Your employer profit-sharing contribution is 25% of adjusted net earnings, which works out to about 20% of net profit. Then add your employee elective deferral, up to $24,500 for 2026, plus a $8,000 catch-up if you are 50 or older. The combined total cannot exceed $72,000, or $80,000 with catch-up. A Solo 401(k) contribution calculator can confirm the math before you fund the account.

Do employer contributions count toward the Solo 401(k) annual limit?

Yes. Employer profit-sharing contributions count toward the combined annual additions limit, which is $72,000 for 2026, or $80,000 for those 50 and older. The employee elective deferral limit of $24,500 is separate and sits inside that total. If you contribute the full deferral plus catch-up, your remaining room for employer contributions shrinks accordingly. Tracking both pieces together prevents accidentally exceeding the cap and triggering excess contribution penalties.

Can I make Solo 401(k) contributions after the end of the tax year?

Employee elective deferrals must be withheld from W-2 wages by December 31 for S corporation owner-employees. Employer profit-sharing contributions can be made up to your tax filing deadline, including extensions, which is typically April 15 for sole proprietors and March 15 for S corporations. If you extend your return, you generally have until October 15 to fund the employer portion. Missing these dates means losing the deduction for that tax year.