The "25% of compensation" rule is the most misquoted number in self-employed retirement planning. Enter your net Schedule C income to get the real compensation base after self-employment tax, the maximum employer profit-sharing contribution, and how much §415(c) room a SEP or SIMPLE would leave unused.
Line 31 of Schedule C, before the self-employment tax deduction. W-2 income does not count here.
2026 limit is $24,500 ($32,500 with the age-50 catch-up). Deferrals must come from earned income and cannot exceed it.
Age 50+ adds an $8,000 catch-up to the deferral and raises the §415(c) ceiling to $80,000.
| Net SE income | Compensation base | Employer 25% | Deferral | Total | Room left |
|---|---|---|---|---|---|
| $100,000 (age 35) | $92,935 | $23,234 | $24,500 | $47,734 | $24,266 |
| $100,000 (age 52, catch-up) | $92,935 | $23,234 | $24,500 + $8,000 | $55,734 | $24,266 |
| $50,000 | $46,468 | $11,617 | $24,500 | $36,117 | $35,883 |
| $200,000 | $185,883 | $46,471 | $24,500 | $70,971 | $1,029 |
| $350,000 | $333,320 | $72,000 | $24,500 | $80,000 | $0 |
| Net SE income | Solo 401(k) total | SEP IRA total | SIMPLE IRA total | Solo 401(k) advantage |
|---|---|---|---|---|
| $100,000 | $47,734 | $23,234 | $19,288 | $24,500 |
| $100,000 (age 52, catch-up) | $55,734 | $23,234 | $22,788 | $32,500 |
| $50,000 | $36,117 | $11,617 | $17,894 | $24,500 |
| $200,000 | $70,971 | $46,471 | $22,076 | $24,500 |
| $350,000 | $80,000 | $72,000 | $26,500 | $8,000 |
All rows assume a full $24,500 deferral where the plan allows it, and no catch-up unless noted. Every figure is produced by the same functions the calculator runs against your inputs.
At $100,000 of net income the 25%-of-compensation rule binds, not the $72,000 ceiling — the employer piece maxes out at $23,234, and $24,266 of room goes unused because the business simply did not earn enough. At $350,000 the inputs flip: the employer piece hits the $72,000 cap, and for a 52-year-old the deferral and catch-up still fit because they sit outside the employer limit.
Everyone quotes the solo 401(k) employer contribution as "25% of compensation." For a sole proprietor that is misleading, because your compensation for retirement-plan purposes is not your net profit. It is net profit minus half of your self-employment tax. Once you apply 25% to that reduced base, the effective rate against net profit works out to roughly 20%.
The employee deferral is separate and does not reduce the employer contribution, which is why a solo 401(k) can stack $24,500 of deferral on top of a $23,234 employer piece — $47,734 total on $100,000 of profit. A SEP IRA has no deferral at all, so the same business can only shelter $23,234.
SEPs are simpler to open and administer — no Form 5500 once assets exceed $250,000, no annual plan document. If you contribute at or near the same dollar amount and value simplicity, the administration savings can outweigh the missing deferral. But at any income where the deferral is affordable, the solo 401(k) shelters roughly 20-25% more.
A SIMPLE IRA has a much lower ceiling: $16,500 deferral plus a 3% match, capped around $37,500 total. For anyone netting more than about $75,000 the SIMPLE leaves five figures of deduction on the table compared with a solo 401(k) — the only reason to choose it is that it is available through an employer, not as a self-employed plan.
Employee deferrals for a sole proprietor must be elected by December 31 (though funded by the return due date). The employer profit-sharing contribution can be made up to the extended filing deadline of the business return, which makes a solo 401(k) the more flexible vehicle for a late tax-planning decision.
A $47,734 contribution on $100,000 of net profit sounds enormous, but the deduction is only worth your marginal rate. At a 24% federal rate plus 5% state, a $23,234 employer contribution saves about $6,700 in tax — the other $16,500 is simply income deferred, not income forgiven.
That framing matters when you are deciding whether to contribute at all. Deferral is close to free; the employer profit-sharing piece is a real trade of liquidity for a deduction. If you will be in a lower bracket in retirement, the deduction is worth more than the eventual tax, and the contribution is efficient. If you expect to be in the same or a higher bracket, the arithmetic flips.
The other consideration is the qualified business income deduction. A solo 401(k) employer contribution reduces QBI on the Schedule C, which can reduce the 20% QBI deduction itself. The net tax benefit of the employer piece is therefore slightly less than your headline marginal rate suggests — typically one to two percentage points lower.
| Solo 401(k) | SEP IRA | SIMPLE IRA | |
|---|---|---|---|
| 2026 contribution ceiling | $72,000 ($80,000 with catch-up) | $72,000 | ~$37,500 |
| Employee deferral | Yes, $24,500 | No | Yes, $16,500 |
| Catch-up (50+) | $8,000 | None | $3,500 |
| Roth option | Yes (SECURE 2.0) | SEP Roth, limited | Yes |
| Form 5500 | Required above $250,000 | Never | Never |
| Loans permitted | Yes | No | No |
| Setup deadline | Dec 31 for deferrals | Tax filing deadline | Oct 1 |
No. It is 25% of compensation, where compensation is net self-employment income minus half your SE tax. Against net income the effective rate is about 20%. On $100,000 of net profit, the ceiling is $23,234, not $25,000.
The §415(c) annual additions limit is $72,000, or $80,000 if you are 50 or older and eligible for the $8,000 catch-up. That total combines the employer contribution, your deferral, and the catch-up.
Yes. A one-participant 401(k) requires a plan document and annual Form 5500-EZ once assets exceed $250,000. A SEP IRA needs no plan document and no Form 5500 regardless of balance — that is the main administrative difference.
Not for the same year with overlapping contributions beyond the shared §415(c) limit. Many practitioners use a solo 401(k) for deferrals and employer profit sharing in one plan rather than maintaining two.
No. The employer profit-sharing contribution is deductible against income tax but does not reduce self-employment tax. Only the deduction for half of SE tax does that.
Yes. A sole proprietor can fund the employer contribution up to the extended due date of the return (September 15 for an extended Schedule C filer). Employee deferrals must be elected by December 31, and first-year plans have a special election window.
⚠️ Important: This calculator estimates 2026 federal contribution limits for a sole proprietor with no W-2 employees and no other plan participation. It does not account for the QBI deduction interaction, state tax treatment, multiple-employer plan aggregation rules, or the special first-year election window. Contribution limits are indexed annually — confirm the current figures with the IRS and a plan administrator before funding.