Profit Sharing Plan Contribution Limits: $72,000 and 25% Rules

For 2026, profit sharing plan contribution limits work on two tracks that operate independently. No single participant’s account can receive more than $72,000 in total annual additions (or 100% of that person’s compensation, whichever is lower), and the employer’s deduction across the whole plan is capped at 25% of the eligible participants’ compensation. Both calculations use the same compensation ceiling: only the first $360,000 of any employee’s pay counts.¹

The $72,000 Per-Participant Limit

The IRS calls this the annual addition limit. It’s the total of everything credited to a single participant’s account during the year, and for 2026 it can’t exceed the lesser of $72,000 or 100% of that person’s compensation.²

Three things count toward the $72,000:

Employer profit-sharing contributions
Forfeitures reallocated from other employees who left before fully vesting
Any voluntary after-tax employee contributions the plan allows

Forfeitures trip up plans more often than the other two. When a departing employee gives up an unvested employer contribution, that money either offsets future employer contributions or gets reallocated to remaining participants. Reallocated forfeitures land in individual accounts and count against those participants’ $72,000 caps. Missing that math is one of the most common compliance errors the IRS identifies.³

The 100%-of-compensation piece binds at lower salaries. An employee earning $60,000 can’t receive more than $60,000 in total annual additions no matter what the employer wants to allocate. For higher earners, the dollar limit is what actually bites.

The Compensation Cap Behind Every Calculation

Plans can only recognize the first $360,000 of pay per person in 2026.¹ Someone earning $500,000 is treated as earning $360,000 for both the per-participant limit and the employer deduction limit. The cap was $350,000 in 2025 and $345,000 in 2024, and it adjusts each year for inflation.

Compensation for plan purposes generally means W-2 wages: salary, bonuses, commissions, overtime. Fringe benefits and certain deferred compensation are typically excluded, but the plan document controls the exact definition.

When the Plan Also Has a 401(k) Feature

Many profit-sharing plans include a 401(k) component. When they do, the $72,000 annual addition limit applies to the combined total of employee elective deferrals, employer matching contributions, and employer profit-sharing contributions in that one account.²

Elective deferrals have their own inner cap. For 2026, an employee can defer up to $24,500 of salary into the 401(k) portion.¹ That $24,500 counts toward the $72,000, leaving up to $47,500 of room for employer matching plus profit sharing before the ceiling closes.

Catch-Up Contributions Sit Outside the Limit

Catch-ups are the reason older participants can exceed $72,000. They don’t count toward the annual addition limit.

For 2026, the standard catch-up for employees aged 50 and over is $8,000, which brings the maximum possible total to $80,000.¹ SECURE 2.0 created a larger “super catch-up” for participants who are 60, 61, 62, or 63. Those employees can contribute an extra $11,250 instead of $8,000, pushing the theoretical maximum to $83,250.⁴ Once a participant hits 64, the standard $8,000 catch-up returns.

Catch-ups are employee elective deferrals only. They don’t expand what an employer can contribute through the profit-sharing formula.

The Employer’s 25% Deduction Limit

The per-participant cap governs individual accounts. A separate rule under Section 404 of the tax code governs how much the employer can deduct across the whole plan: 25% of the total compensation paid to all eligible participants during the year.⁵

The same $360,000 compensation cap applies here. A company with ten eligible employees whose combined capped compensation totals $1,500,000 can deduct up to $375,000. The employer allocates that pool according to the plan’s formula, subject to each participant’s $72,000 ceiling and to nondiscrimination testing that prevents the money from concentrating on owners and highly paid employees.

Going over the 25% ceiling costs money in two ways. The excess isn’t deductible in the current year, and a 10% excise tax applies to the nondeductible portion.⁶ Contribute $600,000 against a $500,000 limit and the $100,000 excess triggers a $10,000 excise tax on top of losing the current-year deduction. The excess can be carried forward and deducted in a future year when there’s room under the 25% ceiling, but the excise tax hits in the year of the overage.

How Self-Employed Contributions Work

Solo owners and partners can run profit-sharing plans, often through a solo 401(k), but the math shifts because the same person is both employer and employee. Compensation for a self-employed participant means net self-employment earnings after subtracting both the deductible portion of self-employment tax and the retirement contribution itself.⁷

Because the contribution is part of the formula that determines the base it’s calculated from, the calculation is circular. The IRS handles this by requiring a reduced rate. In practice, a 25% employer rate works out to roughly 20% of net self-employment income before the plan contribution. The formula: divide the plan contribution rate by one plus the contribution rate. For 25%, that’s 25% ÷ 125% = 20%.⁸

If the plan is a solo 401(k), the $24,500 elective deferral (plus any catch-up) comes off the top before the percentage is applied to the remaining income. The $360,000 compensation cap and the $72,000 annual addition limit apply the same way they do for a W-2 employee at a large company.¹

The Deadline for Funding

An employer doesn’t have to deposit profit-sharing contributions by December 31. The contribution is deductible for a given tax year as long as it lands in the plan’s trust by the due date of the employer’s tax return, including extensions.⁹ For a calendar-year C corporation, that’s April 15, or October 15 with an extension.

Two conditions apply. The employer must treat the contribution as if it was made during the plan year for allocation purposes, and the deadline tracks the extended due date regardless of when the return is actually filed. Filing early doesn’t shrink the window.

What Happens if the Limit Is Exceeded

When a plan accidentally allocates more than $72,000 to a participant’s account, the IRS expects a correction under the Employee Plans Compliance Resolution System (EPCRS). In a combined 401(k) and profit-sharing plan, unmatched elective deferrals come out first (plus investment earnings), followed by matched deferrals with the related match forfeited, and finally employer profit-sharing amounts get forfeited until the account is back within limits.³

Corrective distributions are reported on Form 1099-R and are taxable to the participant, though the 10% early distribution penalty doesn’t apply. They can’t be rolled into an IRA or another plan. Forfeited employer amounts go into an unallocated plan account and reduce employer contributions in future years. Most of these errors qualify for self-correction, which is considerably cheaper than dealing with them during an IRS audit.

1
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
2
Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits
3
Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Limit Contributions for a Participant
4
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
5
Office of the Law Revision Counsel. 26 U.S. Code 404 – Deduction for Contributions of an Employer to an Employees Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan
6
Office of the Law Revision Counsel. 26 U.S. Code 4972 – Tax on Nondeductible Contributions to Qualified Employer Plans
7
Internal Revenue Service. Publication 560 (2025), Retirement Plans for Small Business
8
Internal Revenue Service. Self-Employed Individuals: Calculating Your Own Retirement Plan Contribution and Deduction
9
Internal Revenue Service. Deductibility of Employer Contributions to a 401(k) Plan Made After the End of the Tax Year