How Solo 401k Contributions Affect the QBI Deduction

Looking to keep more of your pass-through business earnings? You may be eligible for a 20 percent Qualified Business Income (QBI) deduction under IRS Section 199A. 

But here’s what many people overlook: while Solo 401k contributions offer valuable retirement benefits, they can also reduce your QBI—and with it, your deduction. Whether you contribute pre-tax or Roth dollars can impact how much of the 20 percent deduction you’re eligible to claim.

This guide explains how Solo 401k contributions affect the QBI deduction, what income limits to watch, and why choosing the right contribution type could make a meaningful difference in your overall tax savings.

What QBI Means for Your Tax Savings

Qualified Business Income, or QBI, is the net income your business earns before deductions like Solo 401k contributions and self-employment taxes. If you’re a sole proprietor, run an LLC, or own an S corp, you might qualify for a tax break worth up to 20 percent of that income, thanks to a rule called the Section 199A deduction.

Here’s what counts as QBI:

✅ Business income from a pass-through entity (like a sole prop, partnership, or S corp)

✅ Income that’s not wages you pay yourself as an employee

✅ Some rental income may qualify, if it meets certain business activity rules

📝 Note: The QBI deduction helps reduce income tax, not self-employment tax. The more you deduct from business income (like pre-tax Solo 401k contributions), the lower your QBI might be which could shrink your deduction.

Solo 401k Contributions Overview

When you contribute to a Solo 401k, you act as both the employee and the employer. This allows for multiple contribution types, each with distinct tax implications that may affect your QBI differently.

✅ Traditional (Pre-Tax) Employee Contributions
You can contribute up to $23,500 in 2025. If you’re age 50 or older, you might be eligible for an additional catch-up contribution of $7,500, for a total of $31,000. These contributions reduce your adjusted gross income (AGI) and taxable income, and may also lower your QBI for deduction purposes.

✅ Roth Employee Contributions
Made with after-tax dollars, Roth contributions do not reduce AGI or QBI. However, qualified withdrawals in retirement are generally tax-free, making them attractive for long-term tax planning.

✅ Profit-Sharing (Employer) Contributions
As the employer, you may contribute up to 25% of your compensation. Since these contributions are pre-tax, they typically reduce both AGI and QBI.

📝 Note: For 2025, total Solo 401k contributions (employee + employer) are capped at $70,000, or $77,500 with catch-up contributions. Your net income and business type determine how much you can contribute.

📌 Also Read: What Is A Solo 401k? Rules, Eligibility, and FAQ for 2024 & 2025

How Solo 401k Deferrals Change QBI

Pre-tax Solo 401k contributions count as business deductions. How much they reduce your Qualified Business Income (QBI) depends on how your business reports them.

✅ If you’re a sole proprietor or in a partnership
Pre-tax contributions are deducted on your personal tax return, which reduces your business income. Since QBI is calculated from that income, your QBI usually goes down too.

✅ If your business is an S corporation
Employee deferrals come from your W-2 wages. These wages are not included in QBI, so they typically do not change it. But employer contributions are treated as a business expense. That means they reduce the income passed through to you, and your QBI may go down.

Why Roth Solo 401k Contributions Don’t Affect QBI

Roth contributions go into your Solo 401k after income tax. The IRS states that designated Roth dollars are not excluded from an employee’s gross income, so they do not reduce adjusted gross income or qualified business income (QBI). So, your potential 20 percent QBI deduction generally stays the same.

When Roth Solo 401k contributions may be helpful:

✅ You’re near the QBI phase-out range and want to avoid lowering your income further

✅ You can handle the taxes today and expect to be in a higher tax bracket later

✅ You want to preserve your QBI deduction without reducing your reported income

📝 Note: Newer rules also allow Roth employer contributions under SECURE 2.0, which are taxed up front. These contributions also leave your QBI untouched because they’re not deducted from your income.

Key Income Limits That Affect Your QBI Deduction

IRS Section 199A bases the deduction on your taxable income before the QBI deduction. Dollar limits adjust each year for inflation, so always confirm the latest Form 8995 instructions. For tax years beginning in 2025, here are the income brackets to keep in mind:

✅ Full 20 percent QBI Deduction Available

At or below these limits, the full 20 percent QBI deduction generally applies with no wage or property limitations, regardless of your business type.

✅ Phase-In Range  (Partial Deduction)

Within this range:

✅ Above the Phase-In Cap

At this level:

📝 Note: These thresholds typically rise each year, so check the current IRS instructions for your 2025 filing season.

✏️ Hypothetical Example:

Here’s how a $20,000 traditional Solo 401k deferral could shift a single filer’s 2025 QBI deduction:

Scenario (single filer)

Step	Amount	How it affects QBI
1. QBI before contribution	$180,000	Qualifies for the full 20 percent deduction
2. Initial QBI deduction	20 percent × $180,000 = $36,000	—
3. Make $20 000 pre-tax deferral	QBI drops to $160,000	Contribution lowers ordinary income and QBI
4. New QBI deduction	20 percent × $160,000 = $32,000	Deduction falls by $4 000
5. Net tax-favored reduction	Taxable income falls $16,000 overall	$20 000 deferral minus $4 000 lost deduction

What this shows:

A traditional Solo 401k deferral may reduce your taxable income, but it could also lower your QBI, which in turn reduces the QBI deduction. The actual tax benefit is often less than the full contribution itself. Running the numbers (or consulting a qualified tax professional) can help determine whether a traditional or Roth contribution better supports your overall strategy.

📌 For more details about income thresholds, see IRS Revenue Procedure 2024-40.

Ways to Boost Your QBI Deduction

A few small moves before the year ends could make a big difference in how much you keep at tax time. If you’re making Solo 401k contributions and also qualify for the QBI deduction, here are some simple ways to stay ahead:

✅ Check your status before year-end
Use the IRS Form 8995 and instructions to estimate your QBI deduction. This gives you time to adjust contributions if needed.

✅ Know your deadlines
Traditional employee deferrals usually need to be made by December 31. But employer contributions can typically be made later up to your tax filing deadline, including extensions.

✅ Monitor your income range
If your taxable income is near a QBI phase-out limit, a small contribution adjustment might help you qualify for more of the deduction.

✅ Use IRS tools
The IRS Tax Withholding Estimator can give you a quick snapshot of how extra contributions might affect your taxes.

✅ Organize your records
Keep detailed records of payroll, contributions, and plan documents to make things easier when it’s time to fill out Form 8995.

Key Takeaways

Solo 401k contributions could be a helpful way to lower your taxable income. But they might also affect your QBI deduction in ways that are easy to overlook. Understanding how each contribution type interacts with Section 199A rules can help you make more strategic decisions.

If you’re unsure how this applies to your situation, consider working with a tax professional who can walk through the numbers with you.

📌 You might also want to check out our other articles on Solo 401k contribution strategies, income limits, and tax planning tips to avoid common mistakes.

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