A solo 401(k) lets an owner-only business contribute as both employee (the full deferral) and employer (up to 25% of compensation), which beats a SEP at most income levels; a working spouse can participate too, doubling household capacity. It stays "solo" only while no employee is eligible — and the long-term part-time rules now mean even 500-hour-a-year help can trigger eligibility, so track hours and restructure before you grow, not after. File Form 5500-EZ once assets pass $250,000.
Two hats, one plan
A solo 401(k) — the IRS calls it a one-participant 401(k) — is a standard 401(k) whose only participants are a business owner (and, as we'll see, a spouse). Its power comes from letting you contribute wearing both hats at once:
- As employee: the full elective deferral, up to the annual 402(g) limit (the IRS adjusts it most years — current figure at irs.gov), pre-tax or Roth, regardless of what percentage of income that represents.
- As employer: a profit-sharing contribution of up to 25% of W-2 compensation — or, for sole proprietors and single-member LLCs, effectively about 20% of net self-employment earnings after the required adjustments.
The employee deferral is what makes the solo 401(k) dominate the SEP at moderate incomes. A SEP allows only the employer-percentage layer; the solo 401(k) allows that plus the deferral. A freelancer netting $80,000 can shelter several times as much in a solo 401(k) as in a SEP — the comparison is worked in the plan-type guide.
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Employee deferral | None | Yes — up to the annual limit |
| Employer contribution | Up to 25% of compensation | Up to 25% of compensation |
| Roth option | Now permitted, rarely offered | Commonly available |
| Loans | No | Optional, if the document allows |
| Catch-up contributions (50+) | No | Yes |
| Annual filing | None | Form 5500-EZ once plan assets exceed $250,000 |
| Spouse can participate | Yes, as an employee (equal % required) | Yes — doubling household capacity |
| Survives a first hire | Yes (but must fund them equally) | No — becomes a regular 401(k) with obligations |
The spouse rule — the quiet doubler
"One participant" has one generous exception: a spouse who genuinely works in the business and is paid by it can participate fully without ending the plan's owner-only status. The spouse makes their own employee deferral and receives their own employer contribution on their own compensation — potentially doubling what the household shelters. For California couples running a business together, this is often the single largest available tax-advantaged savings channel.
The compensation must be real: actual work, reasonable pay, payroll properly run. Paying a spouse a salary invented for contribution purposes creates employment-tax cost without substance and invites exactly the scrutiny you'd expect. Set the wage to the work, with your CPA in the loop.
The part-time employee trap
Everything above depends on one fact staying true: no common-law employee is eligible for the plan. The moment one becomes eligible, you no longer have a solo plan — you have a regular 401(k) with coverage obligations, nondiscrimination testing (unless designed as safe harbor), full Form 5500 filing, and required employer contributions you never budgeted. Owners who miss this and keep contributing only for themselves are running a disqualification risk on the entire plan.
Historically the screen was simple: employees under 1,000 hours a year could be excluded, so a Saturday helper didn't threaten the plan. That screen has narrowed. Under the SECURE Act and SECURE 2.0's long-term part-time (LTPT) rules, employees who work 500+ hours in consecutive years (two, under current rules) generally must be allowed to make deferrals — part-timers who were once safely excludable no longer are. The LTPT rules have transition details and evolving IRS guidance — but the planning consequence is already clear:
- Track hours for anyone who helps you — family members, seasonal help, the part-time bookkeeper. Roughly 10 hours a week sustained across a year is the danger zone.
- Independent contractors don't count — if they're really contractors. California's strict ABC test (AB 5) makes misclassification its own hazard; a "contractor" reclassified as an employee can retroactively break the plan too.
- Growth is a plan event, not just a hiring event. If a real hire is coming, restructure deliberately — safe harbor 401(k), SIMPLE, or a PEP — before eligibility is triggered, not after. The comparison maps the options.
The administration that actually exists
Solo 401(k)s are marketed as paperwork-free. Nearly — not quite:
- A written plan document, adopted before contributions and restated when the IRS requires (providers handle this, but you are the plan sponsor and administrator).
- Form 5500-EZ, once combined plan assets exceed $250,000 at year-end — and always for the plan's final year. The penalty for not filing is severe relative to the effort of filing; the IRS has a penalty-relief program for late filers precisely because so many owners miss it.
- Deadlines. SECURE-era rules allow establishing a plan up to the tax deadline, but employee deferrals for sole proprietors still carry their own election-timing rules; employer contributions can go in by the filing deadline including extensions.
- CalSavers status. An owner-only business with no employees is exempt from the California mandate anyway — the plan isn't what exempts you; the absence of employees is. See the exemption guide.
If your income is high enough that even the solo 401(k) feels small, the next conversation is a defined benefit layer — see cash balance plans, which self-employed professionals can adopt too.
Common questions
Can I have a solo 401(k) and a regular 401(k) at a day job?
Yes — common for employees with side businesses. The employee deferral limit is one limit across all plans combined, but the employer profit-sharing layer in your solo plan has its own separate overall cap. Coordinating the two is a genuinely good CPA conversation.
Does hiring my child break the plan?
A family employee is still a common-law employee for these rules. Depending on hours and the plan's eligibility terms, a working child can trigger coverage obligations just as any hire can — though plans can generally impose age (21) and service conditions that exclude many young or occasional family helpers. Check the document's eligibility settings before assuming either way.
Roth or pre-tax inside a solo 401(k)?
The same logic as any Roth-vs-traditional decision — your marginal rate now versus at withdrawal — with the wrinkle that self-employment income is volatile: low-income years favour Roth deferrals, high years favour pre-tax. Our Roth vs traditional guide walks the framework.
I forgot to file Form 5500-EZ. How bad is it?
Bad enough to fix immediately rather than hope: late-filing penalties accrue per day. The IRS runs a specific penalty-relief program for late 5500-EZ filers with modest fixed fees, which exists precisely because this is the most-missed obligation in the solo plan world. Talk to your CPA now, not at the next deadline.
Sources
- IRS, One-Participant 401(k) Plans, irs.gov
- IRS, Form 5500-EZ and instructions; penalty relief program for late filers, irs.gov
- SECURE Act § 112 and SECURE 2.0 § 125 (long-term part-time employees); IRS guidance, irs.gov
- IRS, Retirement Plans for Self-Employed People, irs.gov
- CalSavers employer rules, Cal. Gov. Code § 100032; calsavers.com
Self-employed and behind on sheltering income?
Fifteen minutes with your Schedule C or W-2. We'll show you the two-hat math on your actual numbers — and flag the trap if you're near it.