The landscape · Self employed and owners
The solo 401(k) and its two sides
A solo 401(k) is a regular 401(k) for a business with no employees, and the owner contributes on two sides: an employee deferral from pay and an employer contribution from profit.
Who this exists for. This exists for a self employed person or business owner with no employees other than a spouse, who can wear both the employee and employer hats in one plan. Ticks that show it: I earn money on my own (freelance, gig, side work); I own a business with revenue.
How it works
On the employee side, the owner defers up to this year's official 401k elective deferral limit (not yet verified here; see the official source below), plus $8,000 (2026, verified on the official page) from age 50, and that deferral cap is shared with any 401(k) at another job. On the employer side, the business adds up to 25 percent of W2 wages for an S corporation, or about 20 percent of net self employment earnings for a sole proprietor, and the two sides together cannot pass $72,000 (2026, verified on the official page). The employee side can be Roth where the plan document allows it. The plan has to be adopted by the end of the business tax year for deferrals, and a Form 5500-EZ is filed once the balance passes $250,000. Loans and after tax contributions are allowed where the document provides. A plan that later covers a nonspouse employee stops being a solo plan and has to follow the full rules.
What it gives
The employee deferral lets a modest profit year still hold a large contribution.
A Roth side and a loan feature are available, which a SEP does not have.
The solo 401(k) does not count in the IRA pro rata pool, which keeps a backdoor Roth clean.
What it costs, or where the catch is
Setup takes a plan document and a provider, and a yearly form is due above the balance threshold.
The deferral cap is shared with a day job's 401(k), so a side business adds only the employer side for someone already deferring at work.
Hiring an employee ends the solo status and brings testing and coverage rules.
A worked example
Chen runs a sole proprietorship with $60,000 of net profit and no day job. On the employee side he defers $15,000. On the employer side the base after half of self employment tax is about $55,760, and 20 percent of that is about $11,150. His total is $15,000 plus $11,150, which is $26,150, far above what a SEP alone would allow on the same profit, since a SEP would stop near $11,150.
Where it goes wrong
The common miss is deferring the full employee amount in both a day job 401(k) and a solo plan in the same year, which is an excess deferral that has to be pulled back out.
Who confirms it for you
For your own numbers, a CPA or enrolled agent. This page explains how the rule works for people in general; it does not know your situation and does not tell you what to do.
The official source
IRS: One participant 401(k) plans. Every figure that changes by year comes from the site's rules table, which the watcher checks against the official page on a schedule; where a figure is not yet verified, this page says so instead of printing a number.
Ask about The solo 401(k) and its two sides
A model reads this page and answers from it. It will say when the answer is not on the page. Education, not personalized advice.
Nearby doors
- The health savings account
This applies when a person is covered by a qualifying high deductible health plan and has no other disqualifying coverage, which opens the door to a health savings account.
- The traditional IRA and the deduction phase out
This exists for anyone with earned income who opens an IRA on their own, and especially for a worker who also has a plan at work, since that changes whether the contribution is deductible.
- The Roth IRA and its income phase out
This exists for anyone with earned income below the Roth income lines who wants an account where qualified withdrawals come out tax free.
- The backdoor Roth and the pro rata rule
This exists for a person whose income is above the Roth IRA phase out and who has no pretax money in any traditional IRA.
- The spousal IRA
This exists for a married couple filing jointly where one spouse has little or no earned income and the other spouse earns enough to cover both contributions.
- IRA catch up at 50
This applies when a person who contributes to a traditional or Roth IRA turns 50 during the year, which adds a catch up amount to the yearly cap.
Education, not advice. Wealthy Habitat explains how rules work and never recommends what to do with your money. The No Advice Disclosure.