Maximum retirement contributions for self-employment income in 2025

[Leen1]

Is this right for 2025 or do these limits interact with each other?  Say I have $30K of net profit from schedule C.  Subtracting half my SE tax, I get $27,881.  Can I contribute all of these?:

1. Employer contribution of 20% of $27,881, which is $5,576, to a traditional Solo 401(k).

2. Employee contribution/deferral of $23,500 to a Roth Solo 401(k).

3. Employee contribution of $7,000 to a Roth IRA.

That totals $36,076.  Assuming that I can find the cash, can I do all three of these?  I created the 401(k)s months ago, so there is no issue with that.

[dmertz · Accepted solution]

Almost correct.  However, total additions to the solo 401(k) are not permitted to exceed your net earnings of $27,881, so with a $23,500 Roth 401(k) contribution your employer contribution to the solo 401(k) is limited to $4,381.  Alternatively, you could reduce your employee Roth 401(k) contribution to  $22,305 and make the maximum employer contribution of $5,576.  Including your Roth IRA contribution, the total contributions would be $34,881.  The same earnings that support a Roth 401(k) can also support a Roth IRA contribution.  (The same is not true for deductible 401(k) contributions.)

[Leen1]

Thank you!  If you happen to know what part of the tax code or IRS publication supports that correction, I'd appreciate that.  (Otherwise, I'll figure it out myself!)

Here's a variation that I am also considering and would like feedback.  What if I modify my $30,000 Schedule C net profit by including an expense on Schedule C Line 19 "Pension and profit plans" for $5,656, representing the Employer contribution for me personally, to my traditional solo 401(k)?  Then my Schedule C net profit is reduced to $24,344.  From that value, I compute SE tax and subtract half of it to get to $22,624 net earnings.  I then designate all of that as an Employee deferral.  That increases the total for these two contribution to $28,280, which is $399 higher than the total you give.  Can I do it this way?  (I am assuming that if this is allowed, it doesn't change that I can still give another $7,000 to my Roth IRA, but if that's wrong, please explain.)

Thank you!

[dmertz]

Section 415(c)(1)(B):  https://www.law.cornell.edu/uscode/text/26/415#c

Retirement contributions for the self-employed individual are not permitted to be reported on Schedule C.  Line 19 of Schedule C is only for employer contributions made to the accounts of non-owner employees.  (Of course if you have non-owner employees other than a spouse, you are not permitted to have a solo 401(k), so in your case nothing is permitted to be included on Line 19.)

[Leen1]

Thank you, again!

I do see that IRS publications, IRS form instructions, and a Treasury bulletin put Employer contributions to a traditional 401(k) for an owner-employee on Schedule 1, but put Employer contributions for other employees on Schedule C Line 19.  I guess I should just go with that.

Still, in the tax code itself, I cannot find the underlying verbiage that makes that distinction.  If you happen to know which part of the tax code says that I cannot do as my second post suggests -- that is, I subtract the traditional 401(k) Employer contribution for an owner-employee as would be done for other employees ... before computing SE tax and half of it -- I'd be grateful for that too!  Maybe some way of interpreting 401(c)(1,2,3), 404(a)(8), or 62(a)(6)?

[dmertz]

I think the reporting method derives from the definition of net earnings from self-employment in the tax code and in the Social Security code.  As you found, the instructions for line 19 of Schedule C clearly indicate that the self-employed individual's retirement deduction must be reported on Schedule 1, not on line 19.

Entering any part of the self-employed individual's retirement deduction on line 19 would change net earnings which would change the permissible employer contribution which would change the amount on line 19, a circular calculation.

[VolvoGirl]

I found this on IRS.  Will it help?  Since it  doesn’t break out ER part vs EE part it must be for both

https://www.irs.gov/publications/p560

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), partnerships deduct them on Form 1065, and corporations deduct them on Form 1120 or 1120-S.

Sole proprietors and partners deduct contributions for themselves on line 16 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership.)

[Leen1]

Thank you for all your help!

FWIW, I'm not afraid of circular calculations.  As you know, the IRS instructions have some of that; they end up computing that a 25% maximum contribution by the employer is 20% of the net earnings.

My calculation gives that a 25% contribution is instead 3,717,409/19,717,409 (approximately 18.8534%) of the Schedule C net-profit (as determined before subtracting for the Employer contribution that we are currently computing). With that value then subtracted as a Line 19 expense, then subtracting half of the then computed self-employment tax, and then taking 25% of that ... you get the same Line 19 value back again -- so it is within the 25% limit exactly.  (Well, rounding to nearest dollar at various steps might introduce noise.  Also, if you max out on FICA or max out on the Employer contribution, those too will change the calculation.)

[dmertz]

"I'm not afraid of circular calculations."

Neither am I, but, as indicated in the instructions for line 19, the IRS does not allow it for this purpose.