Solo 401(k) Contributions 101: Breaking Down Employee vs Employer Rules

Alice Ly

3 weeks ago

When you’re self-employed, the Solo 401(k) can feel confusing at first, especially when you hear that you can contribute as both an employee and an employer.

How can you be both? It sounds strange, but that’s why the Solo 401(k) is so powerful. The IRS treats you as wearing two hats, which lets you save more for retirement than most other self-employed plans. We’ll walk through Solo 401(k) contributions step-by-step.

What’s a Solo 401(k)?

A Solo 401(k), which is also called an Individual 401(k), is a retirement plan for self-employed individuals and business owners with no full-time employees other than a spouse.

The major advantage is that you get two ways to contribute, instead of just one.

The Two Types of Solo 401(k) Contributions

Employee Contributions (Your “Personal” Contributions, also called Deferrals)

When you contribute as an employee, it works a lot like a regular 401(k) at a job.

Beginner basics:

You choose how much of your income to set aside
Contributions can be Traditional (pre-tax), Roth, or a mix if your plan allows
There’s a yearly IRS limit on how much you can contribute as an employee

Important: If you also have a W-2 job with a 401(k), this employee limit is shared across all jobs!

Employer Contributions (Your Business’s Contribution, also called Profit-Sharing)

When you contribute as the employer, your business is putting money into your retirement plan.

Beginner basics:

Employer contributions are always pre-tax
The amount is based on your business income
You don’t have to contribute the maximum; it just depends on how profitable the year was

This is the part that lets high earners save much more than a typical 401(k).

How Employee Contributions Work

Employee contributions are usually:

Decided by you during the year
Made throughout the year or funded later
Subject to a hard annual limit

If your plan allows Roth contributions, this is where you choose between:

Paying taxes now (Roth) or
Getting a tax break today (Traditional)

There’s no “right” answer, just whatever fits your tax situation.

How Employer Contributions Work

Employer contributions depend on how your business is set up:

Sole proprietors & single-member LLCs:

Contributions are based on net profit after accounting for self-employment taxes
The effective rate is just under 20% of net earnings

S corporations:

Contributions are based on W-2 wages
Up to 25% of salary

If you don’t have a profit or a salary, then there’s no employer contribution.

How Much Can You Contribute Total?

The IRS sets a total annual limit for Solo 401(k)s that includes:

Employee contributions
Employer contributions

You can’t exceed:

The annual IRS cap, or
Your earned business income

The annual IRS limit is up to $72,000 if under age 50 for 2026. This means your contribution strategy may change from year to year depending on income. Ages 50+ can add $8K to their employee contribution, bringing the total to up to $80,000.

Common Beginner Solo 401(k) Mistakes to Avoid

There are common mistakes that can trip people up.

Assuming you can contribute the max every year, regardless of income
Forgetting that employee limits are shared with W-2 jobs
Waiting too long to set up the plan
Confusing gross revenue with actual profit

A little planning goes a long way toward avoiding extra paperwork and headaches!

The Money Move

Once you understand the employee vs. employer split, the Solo 401(k) becomes much easier to use and much more powerful. You contribute as a worker, and your business contributes as the company.

You get:

Higher contribution limits
Flexibility year to year
Strong tax-saving opportunities

For many self-employed people, this becomes THE backbone of their retirement strategy.

FAQs

1. Do I really get to contribute twice?
Yes, but under two different roles. You contribute once as the employee and once as the employer, within IRS limits.

2. Can I make both Roth and Traditional contributions?
Employee contributions can be both Roth or Traditional (if your plan allows). Employer contributions are always Traditional.

3. What if I have a bad income year?
You can still make employee contributions, but employer contributions depend on profit or wages.

4. Do I need to contribute as both employee and employer?
No. You can do one, the other, or both, depending on cash flow.

5. Is Solo 401(k) better than a SEP IRA?
For many people, yes, especially if you want Roth options or higher flexibility. But it also depends on your situation.