When you’re self-employed, you have the flexibility to set up retirement savings vehicles that in many cases give you the ability to contribute significantly more than traditional employees.
In today’s blog, we will explore the options available to you, starting with how to choose the right savings vehicle for your situation. Every entity, from single proprietor, small businesses, and side-hustles to partnerships and S- or C-corporations, can benefit from understanding their options.
Let’s get started.
Determining the Right Self-Employment Savings Vehicle
The key to choosing the right way to save for your self-employment situation is understanding your options and how your entity structure impacts them. Entity structure affects your contribution limits, and the different options available to contribute to.
Start with Your Entity Structure
Before selecting a retirement plan, you need to understand how your business income is classified for tax purposes.
- Sole Proprietors & Single-Member LLCs (taxed as sole props): Contributions are based on net earnings from self-employment.
- Partnerships: Contributions are based on your share of partnership income.
- S Corporations: Contributions are based strictly on the W-2 wages you pay yourself—not on owner distributions.
- C Corporations: Contributions are based on W-2 wages, and employer contributions are deductible to the corporation.
This distinction is critical because retirement contribution limits are typically calculated as a percentage of compensation. What counts as compensation is dependent on your entity structure.
SEP-IRA
A SEP-IRA (Simplified Employee Pension) is often the easiest retirement plan to establish and maintain. It allows employer contributions of up to 25% of compensation (or effectively 20% of net self-employment income for sole proprietors), up to annual IRS limits.
Typically best for solo business owners or small businesses seeking simplicity and flexibility. Can also be an option for those who have income from a ‘side job’.
Advantages:
- Easy setup and low administrative burden
- Flexible annual contributions (you can skip years)
- High contribution limits
Important Considerations:
If you have eligible employees, you must contribute the same percentage of compensation for them as you do for yourself. This can make SEP plans costly once your team grows.
For S-corporation owners, there’s an additional limitation: SEP contributions are calculated solely on W-2 wages. Owner distributions do not count as eligible compensation.
If you minimize your W-2 wages to reduce payroll taxes, you also reduce the amount you can contribute to a SEP-IRA. Because of this limitation, SEP-IRAs are often less efficient for S-corp owners compared to 401(k) structures.
Solo 401(k)
A Solo 401(k), also called an Individual 401(k), is designed for business owners with no full-time employees (other than a spouse).
You contribute in two capacities:
- As the employee (salary deferral)
- As the employer (profit-sharing contribution)
This dual contribution structure often allows significantly higher total contributions at lower income levels compared to a SEP-IRA.
Advantages:
- Higher contribution flexibility
- Roth option availability (depending on plan)
- Potential loan provisions
- More control over tax strategy
Key Consideration:
Once you hire full-time employees who meet eligibility requirements, you can no longer use a Solo 401(k).
Traditional 401(k) for Business Owners with Employees
If you have employees and want to maintain flexibility and maximize contributions, a traditional 401(k) plan is often the most robust solution.
Advantages:
- Employee salary deferrals
- Employer matching or profit-sharing contributions
- Roth contribution option
- Vesting schedules
- Custom plan design features
Key Considerations:
- Nondiscrimination Testing – Plans must pass annual testing to ensure contributions don’t disproportionately favor highly compensated employees.
- Safe Harbor Provisions – Requires a minimum employer contribution but allows owners to contribute the maximum salary deferral without testing restrictions.
- Administrative Costs – 401(k)s involve more complexity, including formal plan documents and annual filings.
For S corp and C corp owners, contributions are based on W-2 wages. For sole proprietors, employer contributions are based on net earnings from self-employment.
SIMPLE IRA
A SIMPLE IRA works for businesses with 100 or fewer employees and provides a middle ground between a SEP and a 401(k).
Advantages:
Employees can defer income, and the employer must either match contributions up to a set percentage or contribute a fixed percentage for all eligible employees.
Key Consideration:
Simple IRAs contribution limits are lower compared to 401(k) plans.
Defined Benefit & Cash Balance Plans
For high-income business owners seeking to accelerate retirement savings and reduce taxable income.
Advantages:
Defined benefits or cash balance plans can allow significantly larger deductible contributions that can offset taxable income.
Key Considerations:
These plans require consistent funding and more administrative oversight but can be extremely effective for established S- or C-corp owners with predictable cash flow.
Final Thoughts
Choosing the right retirement plan isn’t just about maximizing contributions, it’s about aligning your strategy with your entity structure, how you compensate yourself, whether you have employees, and your long-term tax goals.
For S-corp owners, especially, understanding how W-2 wages impact retirement plan contributions is essential. The structure that minimizes payroll taxes isn’t always the structure that maximizes retirement savings.
When you own the business, you control the strategy. With the right retirement plan in place, you can build both tax efficiency today and financial independence tomorrow. If you have any questions after reading this blog, or would like to discuss your unique situation, please contact us.
Master’s Wealth Management does not provide tax, legal, or accounting advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal, and accounting advisers before engaging in any transaction.
