What Is the Difference Between a Solo 401(k) for a Sole Proprietor vs. an S-Corporation?

For self-employed individuals, a Solo 401(k) (also known as a one-participant 401(k)) is one of the most powerful retirement savings tools available. It allows business owners with no full-time employees other than a spouse to contribute to retirement as both the employee and the employer, significantly increasing annual retirement savings potential.

However, the way Solo 401(k) contributions are calculated depends largely on how the business is structured.

Two of the most common self-employed business structures are:

Watch: Complete breakdown of sole proprietor vs S-corp. for a solo 401k

• Sole Proprietorship (Schedule C)

• S-Corporation (Form 1120-S)

Understanding how Solo 401(k) contributions work under each structure is important because the amount of income needed to maximize contributions and the tax treatment of those contributions can vary significantly.

This guide explains the key differences between Solo 401(k) contributions for a Sole Proprietor vs. an S-Corporation.

Solo 401(k) Contributions for a Sole Proprietor

For sole proprietors, Solo 401(k) contributions are based on net earnings from self-employment.

The calculation starts with:

Schedule C – Line 31 (Net Profit)

From this amount you must subtract:

½ of Self-Employment Tax

The remaining figure represents Net Earnings from Self-Employment (NESE) used to calculate contributions.

Employee Contributions (2026)

For tax year 2026, a sole proprietor may contribute:

• $24,500 employee contribution

• Additional $8,000 catch-up if age 50+

• $11,250 super catch-up if age 60–63

Employee contributions can be made as either:

• Pre-tax

• Roth Solo 401(k)

Employer Contributions

A sole proprietor may also make an employer profit-sharing contribution.

Maximum employer contribution:

Up to 20% of net earnings from self-employment

Calculation:

Because the calculation is based on adjusted self-employment income, it generally takes more income to reach the maximum contribution limit compared to an S-Corporation structure.

Solo 401(k) Contributions for an S-Corporation

When an S-Corporation sponsors a Solo 401(k), contributions are calculated differently.

Owners who participate must receive W-2 wages from the S-Corporation.

All contribution calculations start with:

Form W-2 Box 1 Wages

Employee Contributions

For 2026, employee contributions are:

• $24,500

• $8,000 catch-up (age 50+)

• $11,250 super catch-up (age 60–63)

Employee contributions are calculated dollar-for-dollar based on W-2 wages.

Example:

If your S-Corp pays you:

$24,500 W-2 wages

You could contribute:

$24,500 employee contribution

To contribute more, you must pay yourself higher wages.

Employer Contributions

The employer contribution for an S-Corp is:

Up to 25% of W-2 wages

Example:

If W-2 wages = $100,000

Employer contribution =

$25,000 (25% of wages)

Because the calculation is based on gross wages rather than adjusted self-employment income, an S-Corporation typically requires less earned income to reach the maximum Solo 401(k) contribution limit.

Employer Roth Solo 401(k) Contributions (SECURE Act 2.0)

Under SECURE Act 2.0, Solo 401(k) plans may allow employer contributions to be designated as Roth contributions.

This creates a unique tax treatment:

At the Business Level

The S-Corporation still receives a tax deduction for the employer contribution.

At the Personal Level

The contribution is treated as a:

Taxable in-plan Roth conversion

This means:

• The contribution is taxable on the participant’s personal return

• Form 1099-R must be issued to report the conversion

Although taxes are paid upfront, the funds then grow tax-free inside the Roth Solo 401(k).

Why an S-Corp Often Requires Less Income to Maximize Contributions

In many situations, an S-Corporation structure can be more efficient for maximizing Solo 401(k) contributions.

Key reasons include:

• Employer contributions are based on W-2 wages
• No self-employment tax applies to employer contributions
• Employer contributions are not subject to FICA
• Less earned income is often required to reach the maximum contribution limit

Voluntary After-Tax Solo 401(k) Contributions: How They Work for an S-Corp vs. Sole Proprietor

A Voluntary After-Tax Solo 401(k) contribution is one of the most powerful features available in a self-directed Solo 401(k) because it allows participants to contribute beyond the standard employee deferral limit and potentially convert those funds to Roth using the Mega Backdoor Roth strategy.

Understanding how these contributions work—and how they differ for S-Corporations vs. Sole Proprietorships—is important for maximizing retirement savings.

What Are Voluntary After-Tax Solo 401(k) Contributions?

A Solo 401(k) participant can make three types of contributions:

1. Employee Contributions

2. Employer Profit-Sharing Contributions

3. Voluntary After-Tax Contributions

Voluntary after-tax contributions are:

• Not tax deductible
• Made after income tax is paid
• Allowed only if the plan document permits them

These contributions allow participants to contribute beyond the employee deferral limit until reaching the overall annual contribution limit.

2026 Overall Solo 401(k) Limit

For 2026:

• Total contribution limit: $72,000

• Catch-up contributions (age 50+): $8,000

• Super catch-up (age 60–63): higher limits apply

Voluntary after-tax contributions fill the gap between:

Employee + Employer contributions and the overall annual limit.

Example of Voluntary After-Tax Contributions

Assume a participant under age 50 in 2026:

Employee contribution:
$24,500

Employer contribution:
$20,000

Total so far:
$44,500

Maximum allowed:
$72,000

Voluntary after-tax contribution amount:

$72,000 − $44,500 = $27,500

These funds can then be:

• Converted to Roth Solo 401(k) (in-plan Roth conversion), or
• Rolled to a Roth IRA

This is commonly referred to as the Mega Backdoor Roth Solo 401(k) strategy. Note: The solo 401k participant can choose to solely make voluntary after-tax contributions up to the overall annual contribution limit and not make employee or employer contributions.

How Voluntary After-Tax Contributions Work for an S-Corporation

When the Solo 401(k) is sponsored by an S-Corporation, contribution calculations are based on W-2 wages.

Contribution Order

For an S-Corp owner:

1. Employee contributions (pre-tax or Roth)

2. Employer contributions (up to 25% of W-2 wages)

3. Voluntary after-tax contributions

Key Rule

Voluntary after-tax contributions cannot exceed W-2 compensation.

Example

W-2 wages: $100,000

Employee contribution:
$24,500

Employer contribution (25%):
$25,000

Total so far:
$49,500

Remaining allowed contribution:

$72,000 − $49,500 = $22,500

Voluntary after-tax contribution amount:
$22,500

Tax Treatment

Voluntary after-tax contributions:

• Are not deductible
• Are not taxable when contributed
• Earnings grow tax-deferred

If converted to Roth:

• Only earnings become taxable

How Voluntary After-Tax Contributions Work for a Sole Proprietor

For a sole proprietorship, contribution calculations are based on:

Net earnings from self-employment (NESE)

Formula:

Schedule C (Line 31)
− ½ Self-Employment Tax
= Net Earnings from Self-Employment

Employer contributions are then calculated as:

20% of NESE

After determining the employee and employer contributions, the remaining room to reach the overall annual limit can be filled with voluntary after-tax contributions, or choose to solely make voluntary after-tax solo 401k contributions.

Example

Net earnings from self-employment: $120,000

Employee contribution:
$24,500

Employer contribution (20%):
$24,000

Total so far:
$48,500

Remaining space:

$72,000 − $48,500 = $23,500

Voluntary after-tax contribution amount:
$23,500

Alternatively, you can forgo making employee and employer contributions and solely make voluntary after-tax solo 401k contributions up to the overall annual solo 401k contribution limit.

Key Differences: S-Corp vs Sole Proprietor

Why Voluntary After-Tax Contributions Are Powerful

Voluntary after-tax contributions allow participants to:

• Reach the full Solo 401(k) annual limit

• Convert large amounts to Roth each year
• Avoid IRA pro-rata rules
• Accelerate tax-free retirement savings

This strategy is one of the biggest advantages of a self-directed Solo 401(k) compared to many other retirement plans.

When a Sole Proprietor May Actually Be Better

A new rule from SECURE Act 2.0 may create situations where a sole proprietorship is advantageous.

Beginning in 2026, high-income employees must make catch-up contributions as Roth contributions instead of pre-tax.

This rule applies to:

• S-Corporations

• C-Corporations

However, it does NOT apply to sole proprietors or partnerships.

Because sole proprietors do not receive W-2 wages, they are generally not subject to the mandatory Roth catch-up requirement.

This means:

A sole proprietor may still choose pre-tax catch-up contributions, which may offer additional tax planning flexibility.

Key Takeaways

Solo 401(k) Sole Proprietor

• Contributions based on Schedule C income

• Employer contributions = 20% of adjusted self-employment income

• Often requires more income to maximize contributions

• Not subject to mandatory Roth catch-up rules

Solo 401(k) S-Corporation

• Contributions based on W-2 wages

• Employer contributions = 25% of wages

• Often requires less income to maximize contributions

• May be subject to mandatory Roth catch-up rules beginning in 2026

Final Thoughts

Choosing the right business structure can significantly impact how much you can contribute to your Solo 401(k) and how those contributions are taxed.

For many self-employed individuals, an S-Corporation may allow faster contribution maximization, while a sole proprietorship may provide greater flexibility for certain tax strategies.

Because each situation is unique, it is important to evaluate both the tax implications and retirement planning benefits when deciding which structure is best for your business.

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