How to shrink your tax bill before April 15 (legally)
If you are a solopreneur, you wear all the hats. You are the CEO, the marketing department, and the person making sure the books stay current. But did you know you can also wear two hats when it comes to your retirement?
For sole proprietors who file a Schedule C, the solo 401(k) is one of the most powerful tools available to help you save for the future while significantly lowering your tax bill today.
Here is a simple breakdown of how it works and why it might be the perfect fit for your business.
What is a Solo 401(k)?
A solo 401(k) is a retirement plan designed specifically for business owners with no employees. The only exception is your spouse, if they also work in the business.
Because you are both the employer and the employee, the IRS allows you to contribute to your retirement in both roles. This "double-dipping" is what makes the solo 401(k) so much more powerful than a traditional IRA.
Understanding earned income
Before we look at the numbers, we need to define the starting point: earned income.
When you work for someone else, your contributions are based on your W-2 gross wages. But as a sole proprietor, the IRS looks at your "earned income" instead. Think of this as your business's take-home pay for retirement purposes.
To find this number, you start with your net profit (the bottom line on your Schedule C) and subtract half of your self-employment tax. This adjustment is made because the IRS treats that half of the tax as a business expense rather than personal income.
A quick reality check: Does every solopreneur need to do this math? Practically speaking, this calculation is most critical in two scenarios:
You are planning to "max out" your contributions. To hit the absolute ceiling without over-contributing, you need your exact earned income figure.
Your net profit is low. If your business only made $20,000, you can't contribute $23,500. You need to know your earned income to ensure you don't contribute more than you actually earned.
If you are just getting started and plan to contribute a smaller, fixed amount (like $5,000 or $10,000) and your profit is well above that, calculating earned income may be unnecessary.
How it works for Schedule C filers
Once you have your earned income figure, you can start planning your two types of contributions:
The Employee Contribution (Salary Deferral)
As the employee, you can contribute up to 100% of your earned income, up to the annual limit.
For 2025: The limit is $23,500.
For 2026: The limit is $24,500.
Bonus: If you are age 50 or older, you can add a "catch-up" contribution ($7,500 in 2025; $8,000 in 2026).
The Employer Contribution (Profit Sharing)
As the employer, you can contribute an additional amount. For sole proprietors, this is typically 20% of your earned income.
Quick tip: You might see the number "25%" mentioned in some articles. While corporations use 25%, the math for sole proprietors works out to an effective rate of 20% because of the way self-employment income is calculated.
Total Annual Maximums
When you combine both the employee and employer portions, the total amount you can stash away is impressive. For those looking to maximize their savings, here are the total limits (excluding catch-up contributions):
For 2025: The total combined limit is $70,000.
For 2026: The total combined limit is $73,000.
Keep in mind, the total of all contributions cannot exceed 100% of earned income.
Note: If you are age 50 or older, you can add catch-up contributions on top of these totals!
One last reason to love the Solo 401(k)
Simplicity in administration: Unlike a traditional 401(k) for a large company, a solo 401(k) does not require complex nondiscrimination testing. As long as your plan balance is under $250,000, there is very little annual paperwork required.
Important deadlines to know
One of the biggest myths about the solo 401(k) is that you must have it set up by December 31 to count for the year. Thanks to recent tax law changes (SECURE Act 2.0), Schedule C filers have much more flexibility.
If this is your first year opening a plan, you have until your tax filing deadline (usually April 15) to officially adopt and sign your plan documents for the prior year.
For sole proprietors, you can also decide on and fund your employee contribution up until April 15. (Note: If you extend your taxes, this specific portion usually still needs to be done by April 15).
You can fund the employer "profit-sharing" portion up until your tax filing deadline, including extensions. This means if you file an extension, you could have until October 15 to put that money into your account.
Final thoughts: moving toward financial security
Financial security isn't just about having a balanced set of books today; it is about the peace of mind that comes from knowing your future self is taken care of. By using tools like the solo 401(k), you aren't just checking a box for tax season, you are building a safety net that allows you to grow your business (and your life) with confidence.
→ If you have questions about how to track your income or navigate these numbers, we are here to support you, just reach out!
Note: This post provides general information and is not intended as specific tax or legal advice. Always consult with a qualified tax professional before making significant changes to your retirement strategy.
