OVERVIEW

  • A Solo 401k is available to business owners with no employees other than a spouse.
  • Eligible entities include sole proprietorships, partnerships, LLCs, C corporations, and S corporations.
  • Part-time employees must be included if they are at least age 21 and work 500 hours or more per year for two consecutive years.
  • Contribution rules vary depending on the business structure.
  • The amount you can contribute depends on how income is defined for your entity type.
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The Solo 401k Handbook

The Solo 401k Handbook

Learn how self-employed professionals can contribute more, reduce taxes,* and invest with greater control– using one of the most powerful retirement plans available. Download the free guide, updated for 2025.

**Solo 401(k) eligibility and contribution limits depend on IRS rules. Tax benefits depend on your individual situation. Not all business owners or side-income earners qualify. 2025 limits ($70,000 or $77,500 with catch-up) depend on income and plan design. Plan administrators—not Carry—are responsible for compliance. Carry does not provide tax advice, consult a tax advisor.

Many business owners wonder what types of entities qualify for a Solo 401k. The name itself often creates confusion, leading some to believe it is limited to sole proprietors. In reality, the eligibility rules are broader than most people think.

This article explains which business entities can open a Solo 401k and highlights the key considerations for each structure. By the end, you’ll see how different entities fit within the rules and what that could mean for your retirement savings strategy.

Sole Proprietorship

A sole proprietorship is the simplest business structure. If you start a business and are the only owner, you are automatically considered a sole proprietor—even if you never register your business with the state.

Key points to remember:

✅ Being a sole proprietor does not automatically qualify you for a Solo 401k.

✅ A sole proprietorship may hire employees, which could disqualify you from the plan.

✅ You can only open a Solo 401k if you have no employees other than a spouse.

✅ Part-time workers are counted if they are age 21 or older and work at least 500 hours per year for two consecutive years.

Contribution Rules for Sole Proprietors

  • Employee contributions: Up to 100% of adjusted earned income, capped at $23,500 in 2025 ($31,000 if age 50 or older).
  • Employer contributions: Up to 20% of adjusted earned income.

📝 Note: Sole proprietors do not pay themselves a W-2 salary. Contributions are based on adjusted earned income, which comes from Schedule C profit. This is calculated by:

  • Taking gross self-employment income
  • Subtracting business expenses
  • Subtracting half of the self-employment tax

This adjusted number is what determines how much you can contribute to a Solo 401k as both employee and employer.

Partnership

Many business owners assume that having partners automatically disqualifies them from a Solo 401k. That isn’t the case. Partnerships are eligible as long as there are no employees other than a spouse. Partners are not considered employees, so they do not trigger the restriction.

Here’s how it works:

✅ A Solo 401k plan for a partnership is drafted to exclude partners from employee status.

✅ The exclusion applies to their role, not their name. For example, the plan cannot say “Jim is excluded.” Instead, it states that partners are not included as participants.

✅ This structure keeps the plan compliant with nondiscrimination rules.

Contribution Rules for Partnerships

  • Employee contributions: Up to 100% of income, capped at $23,500 in 2025 ($31,000 if age 50 or older).
  • Employer contributions: Up to 20% of income.

📝 Note: Partnerships do not issue W-2 wages to partners. Instead, each partner reports income on Schedule K-1 and calculates net self-employment earnings on Schedule SE. This figure determines how much you could contribute to the Solo 401k.

✏️ Hypothetical Example: 

Imagine a two-partner business with $150,000 in profit, split evenly. Each partner reports $75,000 on their Schedule K-1. After accounting for the self-employment tax adjustment, contributions would be based on this adjusted amount. 

Each partner could make employee contributions up to $23,500 (or $31,000 if age 50+), plus employer contributions of roughly 20% of their adjusted income.

LLC

An LLC can open a Solo 401k if it has no employees, other than a spouse. This includes part-time workers who are at least age 21 and have completed 500 hours of service per year for two consecutive years. 

Both single-member and multi-member LLCs qualify. In a multi-member LLC, the plan is drafted to exclude members from being treated as employees, which keeps the plan in compliance.

Key points for LLCs

✅ A Solo 401k is available to LLCs with no eligible employees.

✅ Both single-member and multi-member LLCs qualify.

✅ Multi-member LLCs must have plan documents that exclude members from employee status.

Contribution Rules for LLCs

If taxed as a sole proprietorship

  • Employee contributions: Up to 100% of adjusted income, capped at $23,500 in 2025 ($31,000 if age 50+).
  • Employer contributions: Up to 20% of adjusted income.
  • Contributions are based on net income from Schedule C, reduced for the self-employment tax adjustment.

If taxed as a corporation

  • Employee contributions: Up to 100% of W-2 wages, capped at $23,500 in 2025 ($31,000 if age 50+).
  • Employer contributions: Up to 25% of W-2 wages.
  • Compensation is taken from Box 1 of the W-2, with Box 12 pre-tax deferrals added back.

✏️ Hypothetical Example: 

  • An LLC taxed as a sole proprietorship earns $120,000 net income. After accounting for the self-employment tax adjustment, contributions could be made up to the $23,500 employee deferral limit (or $31,000 if age 50+), plus employer contributions of about 20% of adjusted income. 
  • If the same LLC elected corporate taxation and paid the owner $80,000 in W-2 wages, the owner could contribute $23,500 (or $31,000 if 50+) as an employee and $20,000 (25% of $80,000) as an employer.

S Corporation

An S corporation can open a Solo 401k if it has no employees. Only earned income from the business counts toward contributions, not shareholder distributions.

Things to know about S corporations

✅ A Solo 401k is available if there are no employees.
✅ Only earned income qualifies, not shareholder distributions.
✅ Compensation is taken from W-2 wages (Box 1), with Box 12 pre-tax contributions added back.

Contribution Rules for S corporations

  • Employee contributions: Up to 100% of W-2 wages, capped at $23,500 in 2025 ($31,000 if age 50+).
  • Employer contributions: Up to 25% of W-2 wages.

✏️ Hypothetical Example: 

If an S corporation pays the owner $90,000 in W-2 wages, the owner could contribute $23,500 (or $31,000 if age 50+) as an employee and up to $22,500 as an employer.

📝 Note: Distributions paid to you as a shareholder are not considered earned income for Solo 401k purposes and cannot be used to calculate contributions.

C Corporation

Business owners running a C corporation may also open a Solo 401k, provided the company has no employees. As with an S corporation, only earned W-2 wages qualify. Dividends or shareholder distributions are not considered eligible income for contribution purposes.

How contributions work with a C corporation:

✅ You can contribute up to 100% of your W-2 wages, capped at $23,500 ($31,000 if age 50+).
✅ As the employer, the business may contribute up to 25% of your compensation.
✅ The IRS calculates this based on your W-2 Box 1 wages, with Box 12 pre-tax contributions added back.

📝 Note: Contributions must come from W-2 wages, not from investment gains or dividends the corporation distributes.

✏️ Hypothetical Example:

If you pay yourself a W-2 salary of $80,000 from your C corporation:

  • As the employee, you could defer $23,500 ($31,000 if age 50+).
  • As the employer, the C corporation could contribute up to $20,000 (25% of $80,000).
  • Combined, your potential Solo 401k contribution could reach $43,500 (or $51,000 if age 50+).

In Summary

Solo 401ks are not limited to sole proprietors. Any business owner without employees (except for a spouse, who is always allowed to participate) can open one. Once employees meet the 500-hour and two-year rule, the plan no longer qualifies as a Solo 401k.

All eligible business structures enjoy the same tax benefits and investment options. The key difference is how contributions are calculated:

  • Sole proprietors, partnerships, and LLCs taxed as sole proprietorships can contribute up to 20% of adjusted earned income.
  • C corporations, S corporations, and LLCs taxed as corporations can contribute up to 25% of W-2 wages.

📌 For deeper insights into contribution strategies and plan features, check out our other articles:


Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

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