Updated August 2, 2026. Quick answer: the single most common error in self-employed retirement planning is multiplying income by 25%. The correct figure for a sole proprietor is 20% — because the contribution is deductible, so it reduces the very earnings it is calculated from. The IRS resolves that circle with one line: the self-employed rate is the plan rate divided by one plus the plan rate. For 25%, that is 0.25 ÷ 1.25 = 0.20.
The calculator
Why the circle exists
Publication 560 states the problem in a single sentence, and it is the clearest description of it anywhere:
“Compensation is your net earnings from self-employment … This definition takes into account both the following items. The deduction for the deductible part of your self-employment tax. The deduction for contributions on your behalf to the plan. The deductions for your own contributions and your net earnings depend on each other.”
IRS Publication 560
An employee’s 25% is calculated on a salary the contribution does not change. Yours is calculated on a figure the contribution reduces. The rate table exists to break that loop, and it is why every “25% of your income” article overstates what you can actually put in by a quarter.
The method, checked against the IRS’s own example
Publication 560 works an example at an 8.5% plan rate: net profit of $200,000, a self-employment tax deduction of $13,596, giving net earnings of $186,404, and a maximum deductible contribution of $14,540. This calculator reproduces that figure exactly — which is the check that it implements the published method rather than an approximation of it.
The limits it applies are the 2026 ones, which are newer than the edition of the publication carrying that example: annual additions $72,000, elective deferral $24,500, compensation counted $360,000.
The other universal error: one deferral limit, two jobs
The $24,500 employee deferral limit belongs to you, not to each plan. Deferring the maximum at a day job leaves nothing to defer into a solo 401(k) on the side, however much the side business earns. People discover this in March, having over-contributed.
What is not shared is the employer side. The annual additions limit applies per employer, so your side business gets its own, and the 20% employer contribution is unaffected by anything your day job did. That asymmetry is the whole reason a solo 401(k) is still worth opening for someone who already maxes a workplace plan — the calculator above models it directly.
Where a SEP still wins
On the arithmetic above a solo 401(k) beats a SEP at almost every income, because it adds an employee deferral a SEP cannot offer. The SEP’s advantage is elsewhere and it is real: simplicity, no annual filing at any asset level, and a later deadline — a SEP can be set up and funded as late as the extended due date of the return, so it is the plan you can still open for last year. A solo 401(k) adopted after year-end by a sole proprietor has to be in place by the filing deadline without extensions, and deferrals have their own earlier timing.
That difference decides more real cases than the contribution maths does, because most people ask this question in March. The full comparison, by entity type: sole proprietors and S-corporation owners, who compute from W-2 wages instead and get a different answer. Where the crossover sits puts an income figure on it, and why a SEP has no deferrals is the structural reason behind the gap.
Two traps once the plan exists
Form 5500-EZ. A one-participant plan with total assets of $250,000 or less at the end of the plan year does not have to file. Cross that line and an annual return is due, by the last day of the seventh month after the plan year ends. It creeps up on people whose plan has simply been growing, and the penalties for a late filing are not small.
Employees. A solo 401(k) stops being a solo 401(k) the moment you have eligible employees — what happens then — and businesses you also own can be pulled in together under the controlled-group rules, which catch people who thought their two ventures were separate.
The feature that makes a solo plan unusually powerful
Because you control the plan document, a solo 401(k) can be written to allow after-tax contributions and in-plan Roth conversions — the two features most employer plans lack. That puts the mega backdoor within reach of the self-employed in a way it is not for most employees, filling the room up to $72,000 rather than stopping at the deferral limit. It is a plan-design decision to make when you open the account, not something you can bolt on later without amending documents.
On the personal side, a solo 401(k) can also absorb pre-tax IRA balances to clear the way for an ordinary backdoor Roth — the same account solving two problems.
And since nobody is withholding for you: what your safe-harbour number is.
Method and the worked example from IRS Publication 560; 2026 limits from IRS Notice 2025-67, extracted locally. The rate identity is Publication 560’s own Rate Worksheet: self-employed rate = plan rate divided by one plus the plan rate. General information, not tax advice.
For a child, the gate is earned income: a Roth IRA for kids is capped at the smaller of their earnings or the annual limit — an allowance does not count — and if you own the business paying them, the payroll exception applies only to a sole proprietorship or a parents-only partnership, never a corporation.
The self-employment tax the calculator subtracts half of is explained here: 15.3%, both halves, and where the Social Security portion stops.