Can I still open a Solo 401K or SEP IRA last minute to reduce self-employment taxes?

You've got a few things mixed up here, but I can help straighten this out. First, neither a Solo 401(k) nor a SEP IRA will reduce self-employment taxes. Self-employment taxes (15.3% for Social Security and Medicare) are calculated on net business income before any retirement plan contributions. What these retirement plans will do is reduce her income tax, but since you mentioned her income tax is already at zero, this won't provide additional tax savings for her current situation. That said, there are still good reasons to consider these accounts. With a Solo 401(k), she can make both employee contributions (up to $22,500 for 2024) and employer contributions (up to 25% of compensation), with a combined limit of $66,000. With a SEP IRA, she can only make employer contributions up to 25% of her net self-employment income. The deadline difference is important here. For a Solo 401(k), the account must be established by December 31, 2024, though contributions can be made until the tax filing deadline. For a SEP IRA, both establishing the account and making contributions can be done until the tax filing deadline (including extensions).

I was in a similar situation last year and found https://taxr.ai incredibly helpful for figuring out self-employment retirement options. I was also confused about Solo 401k vs SEP IRA and how they affected my taxes. I uploaded my previous tax return and the AI analyzed my specific situation, showing exactly how different retirement accounts would affect both my income tax and self-employment tax. The tool confirmed what others have said - retirement accounts won't reduce SE tax but showed me how much I could contribute based on my specific 1099 income. It also compared potential future tax savings between traditional vs Roth options based on my current zero tax bracket situation.

Just wanted to update after trying out taxr.ai from the recommendation above. I was really surprised by how helpful it was for my freelance tax situation. I've been doing photography on the side and was confused about retirement options like the original poster. The tool clearly showed me that while SEP IRA or Solo 401k wouldn't help with my self-employment taxes, I could still benefit from tax-advantaged growth. It analyzed my specific income and gave personalized contribution limits, which was eye-opening. I didn't realize I could put away that much based on my modest side income! The explanation about December 31st vs. tax deadline requirements for different accounts was super clear too - something I've been confused about for years. Definitely worth checking out if you're self-employed and trying to optimize your tax situation.

I was facing similar self-employment tax issues last year after switching to full-time freelancing. After trying for WEEKS to get through to the IRS to clarify some retirement account questions (kept getting disconnected), I found https://claimyr.com and used their service to get connected to an IRS agent in under 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent confirmed what others have said - retirement accounts won't reduce SE tax, but they clarified exactly when I needed to have accounts established and when I could make contributions. Super helpful for last-minute tax planning. They also explained some health insurance deduction options that DID reduce my SE tax that I hadn't considered.

I need to eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I've been trying to reach the IRS about a similar self-employment retirement question for months. It actually worked exactly as advertised - I got connected to an IRS representative in about 18 minutes. The agent confirmed that while retirement accounts won't lower SE tax, I could still open a SEP IRA until the filing deadline (including extensions), but a Solo 401k needed to be established by December 31st of the tax year. The agent also mentioned something nobody here has brought up - my health insurance premiums as a self-employed person CAN reduce my SE tax. This was a huge revelation that will save me about $700 in SE taxes this year. Honestly worth every penny for that information alone, plus the hours of hold time I didn't have to deal with.

Something nobody has mentioned: your cousin might benefit from an S-Corporation election instead of changing retirement accounts. With an S-Corp, she could pay herself a reasonable salary (subject to SE tax) and take the rest as distributions (not subject to SE tax). For example, if her net business profit is $35,000, she might pay herself a salary of $25,000 (subject to SE tax) and take $10,000 as a distribution (not subject to SE tax). This could save her around $1,500 in SE taxes. There are costs involved (state filing fees, possibly payroll service), but at $35k income level, it might be worth exploring.

One thing I haven't seen mentioned: health insurance! If your cousin pays for her own health insurance as a self-employed person, those premiums can be deducted on Line 16 of Schedule 1, which DOES reduce self-employment tax. This could be significant - if she's paying $400/month for health insurance, that's $4,800 that won't be subject to SE tax, saving about $735 in SE taxes.