Understanding the Tax Advantages of Solo 401(k) for Self-Employed Consultants

You're on the right track, but there are a few adjustments needed in your calculations. Let me break this down: Your self-employment tax calculation comes first. The SE tax is calculated on 92.35% of your net business income ($135,000 × 92.35% = $124,673). The Medicare portion is 2.9% of this amount, which is about $3,616. For your Solo 401(k) contributions, you're correct that as an employee, you can contribute up to $22,500 total across all 401(k) plans in 2025. Since you're contributing $7,000 at your W-2 job, you can put in $15,500 to your Solo 401(k). The employer contribution calculation is where you need a slight adjustment. The 20% calculation is actually based on your net business income AFTER deducting the self-employment tax deduction. So it would be 20% of ($135,000 - $1,808) = $26,638. However, there's a total limit to combined employee and employer contributions - $69,000 for 2025. Your combined contributions would be $15,500 (employee) + $26,638 (employer) = $42,138, which is under the limit. Your final Schedule C income would be $135,000 - $1,808 (half of SE tax) - $42,138 (total 401k contributions) = $91,054.

Hi there! I went through almost exactly this same situation last year with my consulting business. I was so confused about how Solo 401(k)s worked alongside my regular job's retirement plan until I found taxr.ai (https://taxr.ai). Their system analyzed my tax documents and clearly showed me how to maximize my Solo 401(k) contributions. The key insight I learned was that the "employer" contribution calculation gets a bit tricky because you need to deduct the self-employment tax and your "employee" contributions first before calculating the 20%. I was making the same mistake you were in your calculations. The taxr.ai system created this perfect calculation worksheet that showed exactly how much I could contribute in both capacities. Their system also flagged that I could potentially save even more by setting up a specific type of Solo 401(k) that allows after-tax contributions that can be converted to Roth (sometimes called a Mega Backdoor Roth).

Just wanted to follow up on my experience with taxr.ai after trying it based on this thread. It was actually super helpful for my situation! I uploaded my previous year's tax return and my current W-2, and the system immediately identified that I was eligible for a Solo 401(k) for my side business. What really surprised me was the detailed breakdown of exactly how much I could contribute as both "employee" and "employer." It showed me that I was leaving about $13,400 in tax advantages on the table! The system even generated a report that I could take to my accountant explaining exactly how to set up the accounts. The deadline considerations were really helpful too - it flagged that I needed to establish the Solo 401(k) by December 31st, even though I could make some contributions later. Definitely worth checking out if you're trying to optimize retirement contributions with multiple income sources.

If you're having trouble reaching the IRS with questions about Solo 401(k) rules, I highly recommend using Claimyr (https://claimyr.com). I spent days trying to get through to an IRS agent about some specific questions on contribution limits when you have both W-2 and self-employment income. After several failed attempts waiting on hold for hours, I tried Claimyr and got a callback from an actual IRS agent in about 45 minutes. They have this clever system that navigates the IRS phone tree and holds your place in line, then calls you when an agent is available. You can see exactly how it works in their demo video: https://youtu.be/_kiP6q8DX5c The IRS agent was able to confirm my understanding of the contribution limits and clarify some questions I had about the deadline for establishing the plan versus making contributions. Saved me tons of time and confusion!

I need to eat my words and follow up on my earlier comment. After posting my skeptical reply, I decided to give Claimyr a shot anyway because I was desperate to get some answers about my Solo 401(k) contribution limits. I was absolutely shocked when I got a call back in about 50 minutes with an actual IRS representative on the line! The agent walked me through exactly how the contribution limits work when you have both W-2 income and self-employment income. He confirmed that yes, the employee contribution limit ($22,500) is shared across all 401(k) plans, but the employer contribution from my business is separate. For anyone struggling with Solo 401(k) questions, getting direct answers from the IRS was incredibly valuable. I'd spent weeks trying to piece together information from different websites and forums, but getting the official word straight from the IRS gave me confidence to move forward with my plan. Never thought I'd be this excited about talking to the IRS!

Don't forget that you also need to file Form 5500-EZ once your Solo 401(k) balance hits $250,000. I learned this the hard way last year and had to pay a penalty for late filing. The form isn't super complicated but it's easy to miss this requirement since it doesn't kick in right away when you start the plan. Also, make sure you're getting a plan document that allows for both traditional and Roth contributions on the employee side. Not all Solo 401(k) providers offer this flexibility by default, and it's a pain to change providers later.

Has anyone here actually calculated how much they're really saving in taxes with a Solo 401k compared to just paying the taxes and investing in a regular brokerage account? I'm wondering if all this paperwork and complexity is worth it for smaller amounts of self-employment income.