Self-employed 401K contribution - does it matter if I contribute as employee or employer? Running out of time!

The distinction between employee and employer contributions for a Self-Employed 401(k) actually does matter quite a bit! As a self-employed person, you're both the employee and the employer, which gives you two separate contribution buckets. As an employee, you can contribute up to $23,000 for 2025 (or $30,500 if you're 50 or older) through elective deferrals. These are essentially your "salary deferrals" that you're setting aside. As an employer, you can make additional profit-sharing contributions of up to 25% of your compensation (which for self-employed folks is your net earnings after deducting your self-employment tax and your own retirement plan contributions). This can add significantly to your total possible contribution. The combined limit across both types for 2025 is $69,000 (or $76,500 if you're 50+).

I had this exact same confusion last year! I spent hours researching and finally found this tool that helped me figure out exactly how much I could contribute as employee vs employer: https://taxr.ai What it showed me is that the classification REALLY matters for maximizing your contributions. I was about to just put in a random amount as an "employer" contribution not realizing I was potentially leaving money on the table AND could have gotten into trouble with the IRS. The biggest thing I learned is that your "employer" contribution calculation isn't straightforward - there's a specific formula that reduces your effective contribution percentage. The tool did all the calculations automatically based on my business income, expenses, and other factors.

I was super skeptical about using any online tools for something this important, but I finally tried https://taxr.ai after struggling with calculations for hours. The difference between employee and employer contributions turned out to be crucial for my situation! I have a mix of contract work and a part-time job, and I was going to overcontribute without realizing it. The biggest help was seeing how the "employer" contribution is calculated - turns out I was using the wrong formula and would have been off by thousands. I also didn't realize that my W2 job's 401k contributions affect what I can put into my solo 401k as "employee" contributions. My tax bill is about $7,200 lower now because I maxed out correctly! Wish I'd found this earlier in my self-employment journey.

For anyone who's really stuck trying to figure this out and needs to talk to an actual IRS agent (which I eventually had to do), I highly recommend using https://claimyr.com instead of wasting hours on hold. You can see how it works here: https://youtu.be/_kiP6q8DX5c I tried calling the IRS directly about my solo 401k contribution limits four times and never got through. With Claimyr, I had a callback within 45 minutes and got definitive answers about my specific situation. The agent confirmed that employee vs employer classification absolutely matters for compliance and record-keeping. The guidance I got was way more specific than anything I found online, especially since my situation involved some unique circumstances with my business structure.

OK I have to admit I was completely wrong about Claimyr. After my skeptical comment, I decided to try it because I was desperate to fix a solo 401k contribution issue before year-end. They got me through to the IRS in about 35 minutes (I was expecting to wait 2+ hours based on previous attempts). The agent I spoke with was super helpful and walked me through exactly how to classify my contributions correctly between employee and employer portions. Turns out I had been calculating my allowed employer contribution incorrectly for TWO YEARS. The agent helped me understand the proper formula and even explained how to fix my previous returns. Saved me from what could have been a painful audit situation.

One thing nobody's mentioned yet is that employee contributions to your Solo 401k can be designated as either traditional (pre-tax) or Roth (after-tax) if your plan allows it. But employer contributions can ONLY be pre-tax. This was a major factor in my decision about how to classify my contributions. With my income expected to increase in future years, I wanted to maximize my Roth contributions now, so I put the maximum allowed ($23,000) as employee contributions designated as Roth, and then added additional money as employer contributions (which had to be pre-tax).

Has anyone here actually done the calculations for the employer contribution part? I'm trying to figure out what my "net adjusted self-employment income" is supposed to be. Some sources say it's 80% of net business profit, others have this complicated formula with SE tax deduction involved...

Hey Freya! I totally understand the confusion - I went through the exact same thing when I first set up my Solo 401k. The distinction absolutely DOES matter, and here's why: You get two separate contribution buckets as a self-employed person. The "employee" contribution is limited to $23,000 for 2025 (this is like your salary deferral), while the "employer" contribution can be up to 25% of your net self-employment earnings (but there's a formula that effectively makes it about 20%). With your $96k income, you could potentially contribute the full $23k as employee contributions PLUS additional employer contributions based on your net profit after expenses and SE tax adjustments. The total combined limit is $69,000 for 2025. The key deadline difference: employee contributions must be made by December 31, 2025, but employer contributions can wait until your tax filing deadline (including extensions). Since you're running out of time for 2025, focus on maximizing your employee contributions first - you can always add employer contributions when you file your taxes next year!

The timing aspect is really crucial here! Since you mentioned you're running out of time, I'd recommend focusing on getting your employee contributions maxed out first before December 31st. You can contribute up to $23,000 as employee deferrals, and this is the portion that has the hard year-end deadline. For your employer contribution calculation with $96k in income, you'll need to factor in your business expenses and the SE tax adjustment that others mentioned. The effective rate works out to about 20% of your net self-employment income after all adjustments, which could be a substantial additional contribution on top of the $23k employee portion. The good news is you have until your tax filing deadline (even with extensions) to make the employer contributions, so don't stress too much about getting that exact calculation perfect right now. Focus on maximizing that $23k employee contribution before year-end, then work with a tax professional early next year to optimize your employer contribution based on your final 2025 numbers. One last tip - if your Solo 401k plan allows Roth contributions, you might want to consider designating some or all of your employee contributions as Roth, especially if you expect higher income in future years. The employer portion will be pre-tax regardless, so this gives you some tax diversification.