The Solo 401(k) Power Move: Pay Less Tax, Keep More Cash

John is exactly the kind of entrepreneur we love helping. Smart. Scrappy. Growth-minded.

Three years ago, he left corporate life and launched a consulting business. He hustled hard, hit six figures solo, and made the smart move to elect S-Corp status to save on self-employment taxes. But when we sat down for our first strategy session last fall, he said something we’ve heard far too often:

“I’ve just been putting money in a Roth IRA… my CPA said that’s all I could do.”

Sound familiar?

Traditional CPAs often mean well, but they’re tax historians. They report the past. They don’t build proactive systems to help business owners win in real time.

What John didn’t know and what most solopreneurs are never told is that he was eligible to open a Solo 401(k): a retirement plan designed specifically for business owners like him.

One that would allow him to:

• Contribute as both employee and employer

• Stack his S-Corp strategy with powerful deductions

• Cut over $25,000 from his taxable income

• Set up a future-proof retirement plan that grows as his business scales

And here’s the kicker: if he had waited just a few more weeks, it would’ve been too late to set it up and lock in those savings for the year.

If you’re a business owner especially if you’ve structured as an S-Corp, a Solo 401(k) might be one of the most powerful tools in your entire tax and wealth strategy. But it only works if you know how to use it.

In this article, we’ll break down:

• What the Solo 401(k) is (and why it was built for you, not corporate employees)

• How it outperforms SEP IRAs and other common plans

• Ways to use it to slash your tax bill now and grow tax-free wealth

• How to set it up right and avoid costly IRS mistakes

• Real-world case studies of clients who’ve saved $10K–$20K+ using this plan

Let’s make sure you don’t miss what John almost did.

What Is a Solo 401(k)? (Foundational Concepts)

The “Solo 401(k) is the Retirement Plan Designed for You (Not Corporate America)

Most retirement plans are built for people with a boss.

But what if you are the boss?

That’s where the Solo 401(k) comes in. A Solo 401(k) also called an “individual 401(k)” is a retirement savings plan designed exclusively for business owners with no full-time employees other than their spouse.

Here’s what makes it powerful:

• You wear two hats: You’re both the employee and the employer, which means you can contribute in both roles and stack your savings.
  

• You choose your tax advantage: Want deductions now? Use pre-tax or “traditional 401(k)” contributions. Prefer tax-free retirement income? Go with Roth contributions for tax free growth.

• You control it: No big HR department. No waiting on a company match. You call the shots on your terms.

Who qualifies for a Solo 401(k)?

You qualify if:

• You own a business or are self-employed and have no full-time W-2 employees, other than your spouse. (Independent contractors or part-time help working under 1,000 hours per year generally don’t count.)

• You earn active income from the business, this includes W-2 wages (if you’re an S-Corp) or net profit (if you’re a sole prop or single-member LLC). Investment-only income (like rental income with no active business involvement) doesn’t qualify on its own.

• You want to contribute more than a traditional or Roth IRA allows and are looking to both cut current taxes and build future wealth.

This plan is an ideal fit for:

• Consultants, coaches, and creatives who provide professional services and pay themselves through 1099s or via S-Corp payroll

• Real estate professionals actively involved in sales or flipping, and investors who also earn commissions or management fees, not just passive rental income

• S-Corp and LLC owners looking to maximize tax efficiency by blending salary, distributions, and strategic retirement contributions

• Freelancers, side-hustlers, and solopreneurs with variable income who want flexibility and higher contribution limits than IRAs offer

Husband-and-wife businesses with no additional employees, a Solo 401(k) can cover both spouses under one plan, effectively doubling the contribution capacity

How much can you contribute?

Here’s where it gets exciting:

Note: S-Corp owners must use W-2 salary for the “employer contribution” calculation, not distributions. This is yet another reason why paying a “reasonable” salary or compensation to the owner of the S-Corporation is incredibly vital for the success of your S-Corporation. 

Why it matters

The Solo 401(k) doesn’t just help you build retirement wealth.
It’s also one of the most aggressive tax reduction tools available:

• Reduce your taxable income by tens of thousands per year

• Invest in assets with tax-deferred or tax-free growth

• Retain control of your retirement future without waiting on Congress to fix Social Security

Think of it as your personal, portable, and powerful retirement plan built for entrepreneurs, not employees.

How the Solo 401(k) Saves You Money (Now and Later)

If you’ve ever felt like your business income disappears into a black hole of taxes, you’re not alone. But the Solo 401(k) is one of the few tools that lets you legally redirect a chunk of those tax dollars into your future wealth, instead of handing them to Uncle Sam.

Let’s break it into two parts.

Short-Term: Cut Your Tax Bill, Legally

If you’ve ever looked at your business income and thought, “Where did it all go?”, you’re not alone. Taxes can feel like a black hole. But the Solo 401(k) is one of the rare tools that lets you legally reroute money you would’ve paid to the IRS into your own retirement instead.

Here’s how it works, both short-term and long-term.

For business owners looking to pay less tax now, not someday, the Solo 401(k) is a goldmine. It allows you to shift a large portion of your income into a retirement account before the IRS gets its cut, giving you an immediate reduction in taxable income.

Here’s how it works (using 2025 IRS limits):

• As the “employee,” you can defer up to $23,000 of your W-2 income (or $30,500 if you’re over 50).

• As the “employer,” your business can contribute up to 25% of your salary (depending on structure).

• Total? Up to $69,000 in tax-deferred savings or $76,500 if you’re 50 years or older.

As an example, let’s say you’re an S-Corp owner paying yourself a $100,000 W-2 salary:

• You defer $23,000 as an employee

• Your business contributes $25,000 (25% of salary)

• Total contributions: $48,000
  

• Tax savings: $10,000–$15,000+, depending on your bracket

And here’s the kicker: your business deducts the employer portion as a business expense, and you reduce personal taxable income with your employee deferral. 

It’s a double win.

Long-Term: Grow Wealth Without the Tax Drag

Once the money’s inside your Solo 401(k), it grows tax-deferred or tax-free if you choose Roth.

That means:

• No annual capital gains tax

• No dividend tax drag

• More compounding = more money

Why this matters: Every dollar you shield from taxes now has a longer runway to grow. Over 20+ years, that tax deferral can add hundreds of thousands to your nest egg.

Bonus:
If you go Roth, you pay tax now, but all future growth and withdrawals are tax-free (as long as you follow the rules). For younger or growth-focused business owners, this can be a massive boost to your long term savings plan.

Strategic Tip for S-Corp Owners:

Want to really boost your tax savings?

Combine your Solo 401(k) with:

• A reasonable W-2 salary (so you can max employer contributions)

• An Accountable Plan to reimburse tax-free business expenses​

• A properly documented compensation model to stay audit-proof

Why It’s Better Than a SEP IRA

SEP IRAs only let you contribute as the employer, no employee deferrals. 

So, you lose out on that first $23,000 of deduction power. Plus, SEP contributions are based on net business profit, not W-2 wages, so if you’re an S-Corp owner paying yourself a salary, your SEP max could be much lower.

In plain English: A Solo 401(k) = more flexibility + more savings + more control.

Setup and Structure: How to Open and Run a Solo 401(k) Correctly

A Solo 401(k) can be a tax-saving machine or an audit risk depending on how it’s set up and maintained. Many business owners rush to open one in December to “squeeze in deductions.”  But if you don’t structure it correctly, especially if you’re an S-Corp, you could end up over-contributing, misreporting, or getting flagged by the IRS.

Here’s how to get it right from Day One.

Step 1: Check Your Eligibility

Before you do anything, make sure you qualify:

• You must have earned income from a business (not just investment income)

• You must have no full-time employees (besides your spouse)

• Your business can be a sole prop, LLC, S-Corp, or C-Corp but each has unique contribution mechanics

Step 2: Choose the Right Structure

If you’re an S-Corp owner :

• Your employer contributions are based on your W-2 salary, not your owner distributions

• You must run actual payroll (not owner draws) to make valid contributions to a 401(k)

• Use a reasonable salary strategy that’s documented and justified​​

If you're a sole prop or single-member LLC:

• You can contribute based on net business income (after expenses, before SE tax)

• No payroll service needed, but bookkeeping must be tight to be able to properly track your net profits

Step 3: Open the Plan (Before Year-End!)

You must establish the Solo 401(k) by December 31 of the tax year to make contributions, even if you fund it later (up to the tax return deadline, including extensions).

Here’s what to do:

1. Choose a custodian or plan provider

2. Select features: Roth vs. Traditional, loan provisions, etc.

3. Sign the adoption agreement and get your plan EIN (if separate from your business EIN)

4. Fund employee deferrals through payroll and employer contributions by the appropriate deadlines

Step 4: Track Contributions and Stay Compliant

This is where many Solo 401(k) plans fall apart. To protect your deductions and stay audit-safe, you must keep accurate and complete records:

• Track employee vs. employer contributions

• Maintain a clear log of Roth vs. pre-tax amounts

• File Form 5500-EZ annually if plan assets exceed $250,000

• Store all documentation, including:

  • Adoption agreements

  • EIN letters

  • Payroll reports

  • Contribution logs

  • Custodian and transaction records

Missing even one of these steps could result in penalties or a disqualified plan, so it's worth systematizing.

Pro Tip: Build Your Audit Armor

You don’t need to fear the IRS, but you do need to document everything:

• Set up your compensation strategy in writing

• Maintain board minutes if you're an S-Corp with spouse or advisors on record​

• Reconcile your contributions with payroll and your profit & loss reports

• Store plan documents, adoption agreements, EIN letters, and custodian records in your tax file

Bonus Strategy: Combine It With Other Make Taxes Fair Tax Savings Power Tools

• Accountable Plans – To reimburse home office, internet, mileage tax-free​

• Board of Directors – Add strategic planning meetings that are also deductible

• Backdoor Roth – For high-income earners who want tax-free growth on top of Solo 401(k) contributions​

Bottom line:

The Solo 401(k) is only as powerful as the system behind it. Get the structure right now, and you’ll not only reduce taxes, you’ll build a rock-solid foundation for retirement wealth.

Audit Protection: How to Keep Your Solo 401(k) Compliant and Risk-Free

The Solo 401(k) gives you total control over your retirement savings, and with that freedom comes responsibility. Unlike big corporate plans, you’re the one setting up the plan, making contributions, and (in many cases) keeping records. 

And that’s exactly why the IRS pays closer attention to Solo 401(k)s that are misused or misreported.

The good news? Staying audit-safe isn’t hard if you follow the right systems.

Common Red Flags That Trigger IRS Scrutiny

Let’s start with the mistakes that can lead to penalties, back taxes, or disqualified plans:

• Over-contributing: Exceeding annual limits based on salary or profit

• Mixing employee and employer contributions incorrectly (especially in S-Corps)

• Not filing Form 5500-EZ once your plan assets exceed $250,000

• Making late contributions without documentation
  

• Commingling plan assets with personal or business accounts
  

• Using plan loans improperly (or not repaying them on time)

Audit-Safe Best Practices

Here’s how to set up an audit-proof Solo 401(k) system:

1. Create and Keep These Documents

• Adoption Agreement (from your plan provider)

• IRS EIN letter (separate from your business EIN, if applicable)

• Plan Summary Description

• Written compensation strategy (especially if you're an S-Corp)

• Payroll reports showing employee deferrals

• Journal entries or contribution logs showing employer amounts

• Bank statements and transaction records (keep Solo 401(k) funds in a dedicated account)

2. Track Contributions Accurately

• S-Corp owners: Base employer contributions on W-2 wages, not distributions
  

• Sole props/LLCs: Use net Schedule C income after expenses

• Know the maximum contribution limits: $69,000 (2025 limit), or $76,500 with catch-up if you are 50 years or older.

3. File Form 5500-EZ (If Required)

• Only required if your Solo 401(k) assets exceed $250,000
  

• Due July 31 each year (not April 15!)

• Filing late = up to $250/day in penalties, capped at $150,000

• Use IRS EFAST2 system or work with your 401(k) custodian/provider to file this

4. Audit-Proof with a Year-End Review

At the end of each tax year, run through this checklist:

• Did you contribute within IRS limits?

• Do your payroll and contribution amounts match?

• Are contributions properly categorized (Roth vs. pre-tax)?

• Are all plan documents stored and accessible?

• Do your records show that deposits were timely and from the right accounts?

Better yet, do this on a semi-annual or even quarterly basis for a more consistent inspection of where you are at with your progress toward your contribution goals.

Pro Tip: Layer in Other Systems for Full Protection

• Use an Accountable Plan to reimburse home office and travel tax-free, separate from your Solo 401(k), but complimentary for audit defense​

• Keep a board of directors file (even if it’s just you and your spouse) to formalize strategic decisions, salary justifications, and plan reviews​

• Build a “tax vault” folder physical or digital where you store all your compliance docs, receipts, and confirmations

The bottom line is you don’t need to fear audits. You just need a plan and execution.

When you treat your Solo 401(k) like a real financial asset (not just a tax trick), you build serious wealth and sleep well at night.

Solo 401(k) vs. Other Retirement Plans: Which One’s Right for You?

Most business owners don’t choose their retirement plan.
It’s chosen for them by an overwhelmed CPA or a generic financial advisor who defaults to a SEP IRA or tells them to “just do a Roth.”

But if you’re an entrepreneur earning a healthy income and looking to optimize taxes and wealth? The Solo 401(k) almost always beats the alternatives.

Let’s compare the most common options side-by-side so you can see why.

Comparison Chart: Solo 401(k) vs. SEP IRA vs. SIMPLE IRA vs. Roth IRA

Key Takeaways

 Why the Solo 401(k) Wins for S-Corp Owners

• The only plan that lets you contribute both as an employee and employer
  

• SEP IRA limits employer contributions to 25% of W-2 wages but if you're paying yourself a modest salary for tax reasons, that limit is small

• Solo 401(k) lets you stack employee deferrals on top, unlocking way more tax savings

Why It Beats a SIMPLE IRA

• SIMPLE IRAs cap employee deferrals at lower ($16K), require employer match, and have less flexibility

• No Roth flexibility on the employer portion

• No loan provisions or catch-up contributions past a small amount

Why It Pairs Well With a Roth IRA (Not Replaces It)

• Roth IRAs are powerful, but the contribution limits are tiny
  

• High earners are often phased out of Roth eligibility anyway

• If you want tax-free income in retirement, many Solo 401(k) plans let you make Roth employee contributions and tax-deductible employer contribution a best-of-both-worlds combo

WARNING: The SEP Trap for S-Corp Owners

We see this all the time:
An S-Corp owner is told to use a SEP IRA, without realizing that only their W-2 salary counts toward contribution limits.

So if they’re paying themselves $60K and taking the rest as distributions, their SEP cap is just $15,000 versus up to $48,000+ with a Solo 401(k) using the same salary.

That’s a $33,000 mistake in missed contributions and deductions.

Bottom line: Don’t let old advice or outdated strategies hold you back. The Solo 401(k) isn’t just “another retirement account,” it’s a system for cutting taxes and building wealth on your terms.

Clear Action Steps: How to Start a Solo 401(k) Today

You don’t need to be a financial expert. You don’t need to wait until “someday.” And you definitely don’t need to let another year slip by without leveraging one of the most powerful tax-saving tools available to solo business owners. If you're a solopreneur, or you and your spouse run the show, you can start building serious wealth and slashing your tax bill today.

Here’s how to get your Solo 401(k) set up the right way, step-by-step:

Step 1: Confirm Eligibility

Before anything else, make sure you’re qualified. A Solo 401(k) is designed for business owners with no full-time W-2 employees (besides your spouse), and who earn self-employment income.

Make sure your business qualifies:

• You have no full-time employees (other than your spouse)

• You earn self-employment income (W-2 or 1099 depending on entity)

• You want to contribute more than a Roth or SEP allows, and reduce taxes now

Step 2: Choose Your Plan Provider

Your provider matters more than you think. Choose one that aligns with your investment style, fee preferences, and need for flexibility.

You’ve got options:

• Low-fee custodians: Fidelity, Vanguard, Schwab

• Custom providers: MySolo401k.net, Rocket Dollar (good for checkbook control or real estate investing)

• Look for plans that support: Roth contributions, loans, and rollovers

Step 3: Establish Your Plan Before Year-End

This is the most common (and costly) mistake business owners make, they wait too long. To deduct contributions for a specific tax year, you must open the plan by December 31, even if you fund it later (up to your tax return deadline).

To open your plan:

• Choose your custodian or provider

• Complete and sign the adoption agreement

• Obtain a Solo 401(k)-specific EIN (separate from your business EIN, if required)

• Select plan features, Roth vs. Traditional, loans, etc.

Step 4: Decide Contribution Strategy

For S-Corp owners:

• Employee deferrals come from payroll (W-2 wages)

• Employer contributions are based on your salary (not distributions)

For sole props:

• Contributions are based on net business income
  

• Use Schedule C numbers (after expenses, before SE tax)

Pro Tip: Use our [Make Taxes Fair Solo 401(k) Calculator] to plan the ideal W-2/payroll mix for max tax savings.

Step 5: Fund Contributions on Time

Deadlines vary by contribution type, so make sure your cash flow and systems are aligned:

• Employee deferrals must be made by paycheck date
  

• Employer contributions can be made up to your business’s tax deadline
  

• Contributions must be documented and traceable from your business bank account

Step 6: Maintain Clean Records

An audit-safe Solo 401(k) is all about documentation. Keep your records clean and centralized.

• Save your adoption agreement, EIN letter, and contribution logs

• Keep payroll reports and W-2s in sync with your Solo 401(k) numbers

• Store everything in your tax “vault” (digital folder = fine)

• If plan assets exceed $250K, file Form 5500-EZ by July 31

Step 7: Review Annually and Optimize

Your Solo 401(k) strategy isn’t “set it and forget it.” 

Each year, revisit:

• Are you maxing out contributions?

• Do you need to add a Roth bucket?

• Is your W-2 salary still “reasonable” and optimized?

• Are you layering other tools (Accountable Plan, Board of Directors, fringe benefits)?​​

Want Help?

At Make Taxes Fair, we don’t just help you open retirement accounts; we help you build smart, future-proof systems. From plan setup to contribution strategy, from audit defense to layering in advanced tools, we’re here to help you turn your Solo 401(k) into a wealth-building powerhouse.

Real-World Examples & Case Studies

The numbers are powerful.
But the stories? Even better.

Here are three real-life examples (based on common client scenarios) that show exactly how the Solo 401(k) helps business owners legally slash their tax bills and build lasting wealth.

Case Study #1: John, the Consultant

S-Corp | $120,000 salary | No employees

John runs a six-figure digital consulting business and takes a $120K W-2 salary. Before working with us, his CPA had him using a SEP IRA.

What changed?

• Switched to Solo 401(k)

• Contributed $23,000 as employee deferral (pre-tax)

• Business contributed $30,000 as employer

• Total contributions: $53,000
  

• Immediate tax savings: ~$12,000

He’s now investing that money in low-fee index funds growing wealth without the tax drag.

“I had no idea I was leaving money on the table. This was the simplest $12K I’ve ever saved.” – John

Case Study #2: Sarah & Alex, Husband-Wife S-Corp

Online retail business | $200K combined salary

Sarah and Alex co-run an e-commerce brand, each taking a $100K W-2. No employees.

What changed?

• Set up Solo 401(k)s for each of them
  

• Each contributed $23K as employees

• Each business account contributed $25K as employers

• Total tax-deferred contributions: $96,000
  

• Saved nearly $20,000 in federal taxes alone

They also added Roth buckets for future tax-free withdrawals and a board strategy for travel deductions.

Case Study #3: Maria, the Freelance Creative

Single-member LLC | $85,000 net income

Maria’s a graphic designer who files as a sole proprietor. She wanted to start saving for retirement and reduce her tax liability but didn’t think she could contribute much.

What changed?

• Opened a Solo 401(k) with Roth and traditional options

• Contributed $23,000 (pre-tax) as employee

• Added $15,000 employer contribution based on net profit

• Total saved: $38,000
  

• Lowered her AGI enough to qualify for the QBI deduction, saving an extra $3,200

She now makes Solo 401(k) contributions part of her monthly budget, just like rent.

What These Stories Prove

Whether you’re running an S-Corp, freelancing full-time, or building a family business, Solo 401(k)s aren’t just for retirement. They’re tools for:

• Immediate tax savings

• Long-term wealth

• Keeping more of what you earn

Closing Thoughts

Let’s face it, most business owners are overworked and overtaxed.

They hustle to build something great, but nobody hands them a tax-saving roadmap. Retirement planning gets pushed off.  Tax strategies come too late.  And CPAs? Too often they file the past instead of helping shape the future. But you don’t have to accept that.

With a Solo 401(k), you finally have a tool that:

• Slashes your tax bill now
  

• Builds serious wealth for later
  

• Puts you back in control
  

You’ve seen the numbers. You’ve read the case studies. And now, you’ve got the steps.

Here’s the next move:
Don’t let another year go by without a strategy.
Book a free discovery call with our team and let us show you exactly how to:

• Set up your Solo 401(k) correctly

• Maximize every dollar with S-Corp payroll and contribution strategy

• Protect your plan from audit risks

• Layer in advanced tools like Accountable Plans, Board Minutes, and Roth stacking

Entrepreneurs create jobs, solve problems, and move the economy forward. They deserve a tax system that works for them, not against them. Solo 401(k)s are just one of the many tools we use to flip the tax code in your favor. You’ve got options. Let’s build your plan.

Now it's time to take action. If you have any questions, reach out and start a conversation.