Your solo 401k deduction equals the sum of your employee elective deferral (up to $24,500 in 2026) and your employer profit-sharing contribution, with a combined ceiling of $72,000. Sole proprietors and partners claim it on Schedule 1 of Form 1040; S corporation owners split it between the corporation’s return and a reduction in reported W-2 wages. How much you can actually deduct depends on your business structure, your income, and whether you choose pre-tax or Roth treatment on the employee side.
2026 Contribution Limits That Cap the Deduction
A solo 401k deduction has two moving parts, and each has its own ceiling. The employee elective deferral limit for 2026 is $24,500. The employer profit-sharing piece is bounded by a percentage of earnings (covered below). The two together cannot exceed $72,000.1Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
If you turn 50 or older by year-end, add $8,000 in catch-up contributions, raising your deferral ceiling to $32,500. SECURE 2.0 adds a higher tier for ages 60 through 63: catch-ups of $11,250, for a deferral ceiling of $35,750.1Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
One rule catches people with a day job and a side business: the $24,500 deferral limit is per person, not per plan. If you also defer into a 401k at a separate employer, your combined deferrals across every plan have to stay under that single ceiling. The $72,000 total additions limit, however, is tested separately for each employer.2Office of the Law Revision Counsel. 26 US Code 415 – Limitations on Benefits and Contribution Under Qualified Plans
Calculating the Deduction as a Sole Proprietor or Partner
If you file Schedule C or receive a Schedule K-1, start with your net business profit and subtract the deductible half of your self-employment tax. The result is your net earnings from self-employment, and it drives the rest of the math.3Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
Your employer profit-sharing contribution is limited to 20% of those adjusted net earnings. The 20% rate (rather than the 25% you’ll see quoted for corporations) exists because the contribution itself reduces the earnings it’s based on, creating a circular calculation that effectively drops the rate. IRS Publication 560 contains a worksheet that walks the arithmetic step by step.4Internal Revenue Service. Publication 560 – Retirement Plans for Small Business
A worked example. Schedule C net profit of $150,000. Deductible half of self-employment tax: $10,597. Adjusted net earnings: $139,403. Maximum employer contribution at 20%: $27,881. Add the $24,500 employee deferral, and your total deduction comes to $52,381.
The number people get wrong is usually the net earnings figure, which produces an inflated employer contribution. Double-check your self-employment tax calculation before applying the 20% rate.
Calculating the Deduction as an S Corporation Owner
If your business is an S corporation, the formula is simpler but hinges on one input: W-2 wages. As an owner-employee, your elective deferral can be up to 100% of your W-2 compensation, capped at $24,500. The employer profit-sharing contribution can be up to 25% of those same W-2 wages.5Internal Revenue Service. One-Participant 401(k) Plans
Distributions, dividends, and anything else that doesn’t appear on your W-2 cannot be used to boost the contribution base. If your W-2 salary is $120,000, the corporation can put in up to $30,000 as profit-sharing (25% of $120,000), you can defer $24,500 as the employee, and the total deductible contribution is $54,500.
Reasonable Compensation Matters for the Deduction
The IRS requires that your W-2 salary be reasonable for the work you perform. Setting an artificially low salary to minimize payroll taxes is a known audit trigger, and courts have held that the test is whether payments reflect the value of services performed.6Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers A salary that’s too low also shrinks the base for your solo 401k contributions, cutting into the deduction you’re trying to maximize.
Keep W-2 wages and shareholder distributions cleanly separated. The corporation needs to run formal payroll, issue a W-2, and report wages to the Social Security Administration. Recharacterizing wages as “consulting fees” or distributions can lead the IRS to reclassify the payments and potentially disqualify the retirement contribution tied to them.6Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers
Which Contributions Actually Produce a Deduction
Not every dollar you put into a solo 401k reduces this year’s taxes. If your plan document allows Roth elective deferrals, you can route the employee side into after-tax Roth contributions instead. Those produce no current deduction but come out tax-free in retirement, including growth. The employer profit-sharing portion is always pre-tax, regardless of your Roth election, so it always generates a deduction. Both traditional and Roth deferrals count against the same $24,500 and $72,000 ceilings.
Starting in 2026, SECURE 2.0 adds a constraint for higher earners. If your Social Security wages from the prior year exceeded $150,000, any catch-up contributions you make must be designated as Roth. The catch-up is still available, but you don’t get a deduction for it, whether or not your regular deferrals are traditional.
Deadlines for the Deduction to Count
The timing rules differ for the two pieces, and the employee side is the unforgiving one.
For elective deferrals, the plan must exist and a written salary deferral election must be on file by December 31 of the tax year. You cannot retroactively defer compensation you’ve already received. The actual deposit can happen later, up to your business’s tax filing deadline including extensions, but the election itself cannot wait.5Internal Revenue Service. One-Participant 401(k) Plans
Employer profit-sharing contributions have more flexibility. Under SECURE 2.0, you can even establish a brand-new plan by your tax filing deadline (including extensions) and still fund an employer contribution for the prior year. What you cannot do is make a prior-year employee deferral into a plan that didn’t exist before January 1 of this year. That distinction matters for anyone deciding at tax time that they want a bigger retirement deduction: the employer side is still open, the employee side is not.
With an extension, deposits for both pieces can go in up to the extended due date. For sole proprietors, that’s typically October 15; for S corporations filing Form 1120-S, September 15 (or the extended date). Keep records of the actual deposit date in case the IRS wants proof.
Where to Claim the Deduction on Your Return
For sole proprietors and partners, solo 401k contributions go on Schedule 1 of Form 1040, Line 16, labeled “Self-employed SEP, SIMPLE, and qualified plans.”7Internal Revenue Service. Schedule 1 (Form 1040) It’s an above-the-line deduction, so it reduces your adjusted gross income whether or not you itemize.3Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
Lower AGI has ripple effects. It can help you qualify for benefits that phase out at higher incomes: the premium tax credit, education credits, the student loan interest deduction. If you’re sitting just above a phaseout, the solo 401k deduction can bring you back under.
S corporation owners split the reporting. The employer profit-sharing contribution is deducted as a business expense on Form 1120-S, reducing the corporation’s taxable income. The employee elective deferral reduces your W-2 wages directly, so it never appears as income on your personal return in the first place. Confirm the W-2 boxes match the plan records; inconsistencies there are a common audit flag.
If You Contributed Too Much
If total elective deferrals for the year exceed $24,500 (or your applicable catch-up ceiling), withdraw the excess plus any earnings by April 15 of the following year. Meet that deadline and the excess is taxed as income in the year of the original deferral, but you avoid double taxation.8Internal Revenue Service. 401(k) Plan Fix-It Guide – Elective Deferrals Exceeded IRC Section 402(g) Limit
Miss April 15 and the excess is taxed twice: once in the year of the deferral and again when distributed. A 10% additional tax on early distributions may also apply if you’re under 59½ and don’t meet an exception.8Internal Revenue Service. 401(k) Plan Fix-It Guide – Elective Deferrals Exceeded IRC Section 402(g) Limit This usually happens when someone defers into both a solo 401k and a separate employer’s 401k without tracking the combined total. Pull your pay stubs and plan statements before April to confirm you’re under the per-person limit.