Many of our clients are self-employed; most commonly working in their own private practice, providing consulting services or holding positions as locum tenens. And often, this group of self-employed taxpayers have no employees. For our small business self-employed taxpayers, the two retirement planning options that typically work best are either a SEP-IRA or a solo 401(k) plan. The two plans are similar but have key differences.
- SEP-IRA. The maximum annual contribution to this plan is approximately 20% of net Schedule C income or 25% of W-2 wages for S-Corps owners. Capped at $69,000 for 2024.
- Solo 401(k). This plan works similarly to a SEP-IRA but also has a “salary deferral” component (plus “catch-up” provision for taxpayers age 50 or older). The maximum annual employer contribution portion to this plan is approximately 20% of net Schedule C income or 25% of W-2 wages for S-Corp owners – the same allowed funding amounts as a SEP-IRA. However, taxpayers can additionally fund a “salary deferral” portion to the plan that is maxed at the lesser of the owners’ net Schedule C income or W-2 wages for S-Corp owners or $23,000 ($30,500 including $7,500 catch-up contribution) for 2024. Note that this salary deferral limit is also limited by salary deferral amounts additionally funded at other employer retirement plans in a year. The maximum combined employee deferral and employer contribution limit for 2024 is $69,000 ($76,500 including the $7,500 catch-up contribution) for 2024.
For taxpayers considering a SEP-IRA, Solo 401(k) or other retirement plan to fund relevant to their business income, we recommend discussing these options with your tax advisor to review additional features of these plans to help you decide which choice may be best for your specific business.