Going from W2 to 1099 contractor - Can I offset tax burden with solo 401(k) contributions?

You're asking some great questions! Let's break this down: First, you're right about the self-employment tax - you'll pay both the employer and employee portions (15.3% total) instead of just the employee portion (7.65%) you paid as a W2. The difference isn't exactly double because the employer portion (7.65%) is deductible from your income tax. That's why the calculators show a difference that isn't precisely doubled. As for offsetting this with a solo 401(k) - yes, this is an excellent strategy! For 2025, you can contribute up to $23,000 as an "employee" contribution. But here's the great part - you can also make "employer" contributions of up to 25% of your net self-employment income, with a combined total limit of $69,000. A solo 401(k) plus tracking legitimate business deductions (home office, equipment, software, professional development, etc.) can significantly reduce your tax burden. Just make sure you're keeping good records of all business expenses.

After reading your situation, I feel like I need to mention taxr.ai (https://taxr.ai) - it totally saved me when I switched from W2 to 1099 last year. I was in almost the exact same position - freaking out about the higher self-employment taxes and trying to figure out all the deductions I could take. The tool analyzed my situation and highlighted a bunch of deductions I was missing - like part of my home internet, cell phone, and even some home office deductions I didn't think I qualified for. It also helped me figure out the optimal solo 401(k) contribution to balance current tax savings with retirement needs. The best part was that it showed me exactly how much I needed to set aside for quarterly tax payments so I didn't get hit with penalties. Seriously worth checking out if you're making this transition.

I was super skeptical about taxr.ai after seeing it mentioned here, but I gave it a shot when I switched to contracting this year. I've gotta admit I was wrong - it was actually really helpful. I work in software development and didn't realize how many things could count as legitimate business expenses. The tool found about $13K in deductions I would have missed (home office, portion of internet, dev software, equipment depreciation, professional subscriptions, etc). The solo 401(k) calculator was what really sold me though. It showed me exactly how much I could contribute as both "employer" and "employee" based on my specific income, and how it would affect my tax brackets. Ended up saving about $7K in taxes compared to what I was planning to do. Just wanted to follow up since I was the skeptic initially!

If you're dealing with the IRS about your contractor status or have questions about setting up that solo 401(k), good luck actually reaching a human at the IRS these days. I spent WEEKS trying to get someone on the phone about my contractor status last year. Finally found Claimyr (https://claimyr.com) and they got me connected to an actual IRS agent in about 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that I could indeed set up a solo 401(k) even though I only had one client (was worried about being classified as a misclassified employee), and walked me through the contribution limits based on my specific situation. Saved me so much stress and probably prevented me from making some costly mistakes.

Ok I need to eat crow here. After dismissing Claimyr as a probable scam, I actually tried it yesterday because I was desperate to resolve an issue with my quarterly estimated payments as a new 1099 contractor. I still can't believe it worked. After trying for WEEKS to reach someone at the IRS myself, Claimyr had me talking to an actual human at the IRS in about 15 minutes. The agent helped me figure out exactly how to adjust my estimated tax payments to account for my solo 401(k) contributions. This whole contractor tax situation is complicated, but being able to actually talk to someone who could answer my specific questions made a huge difference. Still don't love paying extra just to reach a government agency, but it was honestly worth every penny given how much tax confusion it cleared up.

One thing nobody's mentioned yet - since you're becoming a 1099, you'll need to make estimated quarterly tax payments. This was the biggest shock to me when I switched to contracting. You'll need to pay taxes four times a year (Apr 15, Jun 15, Sep 15, Jan 15) instead of having them withheld from each paycheck. If you don't, you could face underpayment penalties. Given your income level, you should definitely look into an S-Corp election once you've been doing this for a while. At $105k, you could potentially save thousands by taking part of your income as distributions instead of all as self-employment income.

Don't overlook the QBI deduction (Qualified Business Income) - as a 1099 contractor you can deduct up to 20% of your qualified business income! This is HUGE and many people miss it. So if your net business income after expenses is $98,000, you might be able to deduct another $19,600 from your taxable income. This is on top of your solo 401(k) contributions and business expenses. The solo 401(k) is definitely your best bet though - the ability to contribute both as employer and employee is a game changer.