Can I Set Up a 401(k) if I Am Self-Employed with No Employees?

Absolutely -- a Solo 401(k) is specifically designed for self-employed individuals with no full-time employees other than a spouse. Also known as an Individual 401(k) or one-participant 401(k), this plan gives you access to the same contribution limits and tax benefits as the 401(k) plans offered by large corporations, with significantly less administrative burden. For most self-employed individuals, it is the single best retirement plan option available.

Who Qualifies for a Solo 401(k)

Eligibility for a Solo 401(k) requires two things. First, you must have self-employment income from a trade or business. This includes income from a sole proprietorship (Schedule C), a single-member LLC, a partnership, or an S-Corporation in which you are an employee-owner. Freelancers, consultants, independent contractors, and gig workers all qualify as long as they report self-employment income.

Second, you must have no full-time employees other than yourself and your spouse. The IRS generally defines a full-time employee as someone who works 1,000 hours or more per year. You can use independent contractors, part-time workers who work fewer than 1,000 hours annually, or seasonal employees without disqualifying your Solo 401(k). However, if you hire a full-time employee, you must either transition to a standard 401(k) plan that covers the employee or choose a different plan type.

Contribution Structure

The Solo 401(k) allows two types of contributions, each governed by separate IRC sections. The employee deferral under IRC Section 402(g) allows you to contribute up to $23,500 for 2026 from your self-employment earnings. If you are age 50 or older, an additional catch-up contribution of $7,500 is available under IRC Section 414(v), and participants ages 60-63 may be eligible for an enhanced catch-up of $11,250 under SECURE 2.0 provisions.

The employer profit-sharing contribution under IRC Section 401(a)(3) allows an additional contribution of up to 25% of your W-2 compensation (if paid through an S-Corp) or approximately 20% of your adjusted net self-employment income (if a sole proprietor or single-member LLC). The combined total of employee deferrals and employer contributions cannot exceed $70,000 (or $77,500 with standard catch-up) under IRC Section 415(c).

Spousal Contributions -- Doubling the Benefit

If your spouse works in the business and receives compensation, they can also participate in the Solo 401(k) with their own set of contribution limits. This effectively doubles the household's total retirement plan contributions. Your spouse can make employee deferrals up to $23,500 (plus applicable catch-up contributions) and receive employer profit-sharing contributions based on their compensation. For a couple where both spouses work in the business, total annual contributions to the Solo 401(k) can approach $155,000 or more.

The spouse must perform legitimate services for the business and receive reasonable compensation for those services. The compensation must be reported on a W-2 (for S-Corp structures) or documented as partnership distributions or sole proprietorship earnings.

Roth Option

Most Solo 401(k) plans allow designated Roth contributions for the employee deferral portion. Unlike traditional pre-tax deferrals, Roth contributions are made with after-tax dollars but grow and are distributed tax-free in retirement under IRC Section 402A. This option is valuable for self-employed individuals who expect their tax rate to be higher in retirement or who want tax diversification in their retirement portfolio.

Loan Provisions

Unlike a SEP IRA or SIMPLE IRA, a Solo 401(k) can include a loan provision allowing you to borrow up to the lesser of $50,000 or 50% of your vested account balance under IRC Section 72(p). The loan must be repaid within five years (longer if used to purchase a primary residence) with interest at a reasonable rate. This feature provides liquidity without triggering taxes or penalties -- a significant advantage for self-employed individuals who may need access to funds during cash flow fluctuations.

Setup and Administration

Establishing a Solo 401(k) requires adopting a plan document before December 31 of the tax year. Many financial institutions offer free Solo 401(k) plans with standardized documents. More customized plans (such as those allowing after-tax contributions for the Mega Backdoor Roth strategy) typically require a third-party administrator at an annual cost of $500 to $2,000.

Annual filing requirements are minimal. Plans with total assets under $250,000 at year-end are generally exempt from filing Form 5500. Once assets exceed $250,000, Form 5500-EZ must be filed annually -- a simple one-page form. There is no annual actuarial certification or nondiscrimination testing required for a plan covering only the owner and spouse.

Solo 401(k) vs. SEP IRA

The Solo 401(k) is superior to a SEP IRA for almost every self-employed individual. The employee deferral component means you can contribute more at lower income levels. The Roth option is not available in a SEP IRA. The loan provision provides liquidity that a SEP IRA lacks. And maintaining a Solo 401(k) makes Backdoor Roth IRA conversions cleaner by avoiding the pro-rata rule under IRC Section 408(d)(2). The only advantage of the SEP IRA is the ability to establish it after year-end.

This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional regarding your specific circumstances. AE Tax Advisors, 935 Lake Elmo Dr, Suite B, Billings, MT 59105. Phone: (631) 614-5762.