The Solo 401(k): two hats, two contributions, one big nest egg

Who this is for

• A business owner with no common-law employees, or the owner plus spouse.¹
• Hiring eligible employees means they need to be covered too, and the plan stops being "solo" for testing purposes. Plan for that as you grow.

The 2026 numbers

• Elective deferrals: $24,500.²
• Catch-up, age 50+: $8,000. Ages 60–63: $11,250 instead.
• Total annual additions (employee + employer, not counting catch-ups): $72,000.³
• Compensation cap for contribution formulas: $360,000.
• S-corp owners: employer contribution up to 25% of W-2 compensation (as the plan defines it). Distributions don’t count.
• Roth catch-ups: if your 2025 FICA wages were over $150,000, your 2026 catch-ups go in as Roth.
• Form 5500-EZ: generally due once plan assets across your one-participant plans exceed $250,000 at year-end, or in the plan’s final year. It’s due the last day of the 7th month after plan year-end (July 31 for calendar-year plans).⁴

How to do it right

1. Pick a provider and adopt the written plan. IRS Publication 560 says to adopt the plan by the last day of the tax year (Dec 31 for calendar-year businesses) to deduct contributions for that year. Newer rules may allow later adoption for some employer contributions, so check with your CPA on what fits your timeline.⁵
2. S-corp owners: set your deferral election before the paycheck. Deferrals come out of W-2 pay, so get the election in place before your final payroll of the year.
3. Sole proprietors with a brand-new plan: first-year deferrals can count if paid in by the return due date, without extensions.
4. Figure employer contributions by entity type: 25% of W-2 wages for S corps, or the special self-employed calculation in Pub. 560 for sole props.
5. Check plan assets each Dec 31 and file Form 5500-EZ when you cross the threshold.

In an S corp, your salary drives the employer side. The S-corp salary calculator helps you land a salary you can explain.

Run it by your CPA

Your CPA can size the salary and contribution combo that fits your cash flow.

Every business is a little different, so check with your CPA for your situation. Good CPAs are on your team, and they love an owner who shows up with the homework done.

More from Dad’s tax playbook

• When the S-corp election pays off: Payroll tax saved minus the cost of running an S corp. The two-column math and Form 2553 timing.
• Put your kids on payroll: By business type: when kids’ pay skips FICA, their standard deduction, and the Roth IRA angle.
• Put your spouse on payroll: Social Security credit in their name, their own 401(k) deferrals, and the QJV option.
• S-corp owner health insurance: W-2 Box 1 only, then Form 7206. One payroll setting, one form.
• The accountable plan: Get paid back for miles, phone and home office without it counting as wages.
• The Augusta rule: Rent your home to your company for real meetings, fewer than 15 days a year.
• Work Opportunity Tax Credit: watch this space: Lapsed for 2026 hires so far. Where it stands, and the playbook if Congress revives it.
• PTET: let your business pay the state tax: How pass-through entity tax elections work around the personal SALT cap.
• Dial in your W-4: Step 2(c), Step 3 and Step 4(c) for owners, spouses and kids on payroll.
• S-corp reasonable salary by profession: pay ranges for 15 professions, the IRS factors and a one-page salary memo.

Payroll Dad is a cartoon run by a real small family business. This is general education, not tax advice for your situation.