For many business owners, a retirement contribution is the largest deduction still open in the last weeks of the year. It is also one of the few that puts the money in your own account instead of someone else's.
Two plans come up most often for owners with few or no employees: the Solo 401(k) and the SEP-IRA. Both can lower this year's tax bill. They do not share the same deadlines, and the difference matters in December.
This article is general information about 2026 retirement plan rules. It is not tax or investment advice for a particular business or household.
The 2026 numbers
The IRS published the 2026 limits in Notice 2025-67.
- 401(k) elective deferral: $24,500.
- Catch-up, age 50 or older: an additional $8,000.
- Catch-up, age 60 through 63 in 2026: an additional $11,250, in place of the $8,000.
- Total defined contribution limit (section 415(c)): $72,000, not counting catch-up contributions.
- SEP-IRA: the lesser of 25% of compensation or $72,000.
- Compensation cap: $360,000 of compensation can be counted for both plans.
A SEP has no elective deferrals and no catch-up contributions. Every dollar is an employer contribution.
How each plan works
A Solo 401(k) is a regular 401(k) plan that covers only the owner, or the owner and a spouse. The owner contributes in two roles. As the employee, you can defer up to $24,500 of your compensation, plus any catch-up. As the employer, the business can add a nonelective contribution of up to 25% of compensation. If you hire employees who become eligible, the plan has to cover them, and the "solo" advantages go away.
A SEP-IRA takes only employer contributions, up to 25% of compensation. It is simple to set up and simple to run. If you have eligible employees, the business has to contribute for them at the same rate it uses for you.
For a sole proprietor or a single-member LLC taxed as a disregarded entity, "compensation" is net earnings from self-employment after you subtract half of your self-employment tax and the contribution itself. In practice, the 25% employer rate works out to 20% of that adjusted amount. IRS Publication 560 has the worksheet.
That is why the two plans can produce different results at the same profit. As an illustration only, take a sole proprietor under age 50 with $100,000 of Schedule C profit and no other plan:
- SEP-IRA: about $18,600.
- Solo 401(k): about $18,600 as the employer, plus up to $24,500 as the employee, for roughly $43,100.
At higher profits the gap narrows, because both plans run into the same $72,000 total limit. At moderate profits, the employee deferral is what lets a Solo 401(k) reach further.
What has to happen by December 31
S corporation owners: run deferrals through payroll. If you are a shareholder-employee, your compensation is your W-2 wages. A 401(k) deferral comes out of a paycheck, so the plan has to be in place and the deferral withheld through payroll by December 31. The same rule applies to how much you are paid. Reasonable compensation decisions belong in this year's payroll, not on a spring worksheet.
Owners with an existing Solo 401(k): make the deferral election. If your plan was already in place for 2026, elect your employee deferral for the year by December 31. For a self-employed owner, the dollars can follow later, by the due date of the return, including extensions.
Roth catch-up for higher-paid W-2 owners. Starting in 2026, an employee whose 2025 wages from the employer were more than $150,000 has to make any catch-up contributions as Roth. That applies to an S corporation owner paid through payroll. Roth contributions do not lower this year's tax.
Know your profit. Every contribution limit runs off compensation. A current profit-and-loss through November is the starting point. A plan built on stale books is a guess.
What can wait until you file
A SEP-IRA, start to finish. A SEP for 2026 can be set up as late as the due date of the business's 2026 income tax return, including extensions, and funded by that same date. For a sole proprietor filing on a calendar year, that is April 15, 2027, or October 15, 2027, with a filed extension. For a calendar-year S corporation, it is March 15, 2027, or September 15, 2027, with an extension.
A new Solo 401(k) for a sole proprietor. SECURE 2.0 changed the rule here. If you own the entire business, the business is unincorporated, and you are its only employee, you can adopt a new 401(k) after December 31 and still make employee deferrals for 2026. Three limits apply:
- It works only for the plan's first year.
- The deferrals must be made by the original due date of your return, without extensions. For 2026, that is generally April 15, 2027. An extension extends the employer contribution window, not this one.
- It does not cover an S corporation owner, whose deferrals have to come from 2026 wages, or a partnership.
Employer contributions. For a Solo 401(k), the employer contribution generally can be deposited by the due date of the return, including extensions. A plan adopted after year-end can also be treated as in place for 2026 if it is adopted by that date.
Waiting is allowed. It is not always wise. The cash for a contribution is easier to set aside in the fall than to find in April.
How contributions lower this year's tax
Pre-tax contributions reduce taxable income for 2026, even when they are deposited in 2027 under the rules above.
- Sole proprietors and single-member LLC owners deduct contributions for themselves on Schedule 1 of Form 1040, as an adjustment to income. They lower income tax. They do not lower self-employment tax, which is figured on business profit before the deduction.
- S corporation owners see two effects. The corporation deducts its employer contribution. Pre-tax deferrals come out of your federal taxable wages.
- Roth deferrals do not lower this year's tax. The trade is tax-free qualified withdrawals later.
The savings are roughly the contribution times your top tax rate. A $10,000 pre-tax contribution in the 24% federal bracket saves about $2,400 of federal income tax. State treatment can differ.
For a broader year-end list, including estimated payments and equipment timing, see tax prep vs. tax planning before year-end.
Which plan fits
There is no single answer. A few questions usually settle it:
- Do you have employees, or plan to hire soon? That can rule out a Solo 401(k) and change what a SEP costs.
- How profitable was the year? At moderate profit, the Solo 401(k) employee deferral often matters most. At high profit, the two plans tend to meet at the same ceiling.
- How much paperwork do you want? A SEP is lighter. A Solo 401(k) needs a plan document, and once plan assets reach $250,000, an annual Form 5500-EZ.
- Do you want Roth contributions? A Solo 401(k) can offer Roth deferrals.
- How much cash can the business spare? Contribute what the year supports without starving the business of cash it needs in the first quarter.
The answer can change from year to year. That is one reason year-round tax planning works better than a single spring meeting.
A steady close to the year
Finances are one of the tools business owners are trusted to manage. Setting aside part of a good year for the years ahead is faithful stewardship. Choosing the plan and the timing on purpose, with this year's tax in view, is sound financial guidance.
Benford Consulting serves business owners in Florence, AL, with tax planning, tax preparation, and bookkeeping, with wisdom, clarity, and integrity.
Next step
If you want to choose a retirement plan before December 31, or check what can still wait until you file, request a consultation. You can also email kolby@benfordcpa.com with a short note about your business and the plan you are weighing.
There is no obligation in a first conversation. The goal is the next faithful step before the year closes.