One of the most underused tax reduction strategies for small business owners is maximizing contributions to tax-advantaged retirement accounts. Unlike most deductions, retirement contributions reduce both federal income tax and—depending on your business structure—self-employment taxes, making them among the highest-leverage tax planning moves available.
Solo 401(k): The Most Powerful Option for Solo Operators
A solo 401(k) allows self-employed individuals with no full-time employees (other than a spouse) to contribute as both employee and employer. In 2024, the employee contribution limit is $23,000 ($30,500 if 50 or older). As employer, you can contribute up to 25% of compensation. Total annual contributions can reach $69,000 ($76,500 if 50 or older).
SEP-IRA: Simple and Powerful for Businesses with Employees
A SEP-IRA allows employers to contribute up to 25% of compensation (up to $69,000 in 2024) for themselves and all eligible employees. The simplicity is its main advantage—there are no annual filing requirements for small SEPs and the setup is straightforward. The downside is that any contribution percentage you set for yourself must also apply to all eligible employees.
Key Takeaways
- Solo 401(k) contributions can reach $69,000+ annually for solo operators—the highest limit available.
- SEP-IRA contributions of up to 25% of compensation (max $69K) work well for businesses with consistent high earnings.
- Contributions are deductible in the year made, creating a direct current-year tax benefit.
