Thanks to the SECURE Act 2.0, which became law in December 2022, Solo 401(k) employer profit-sharing contributions can now be made in pretax or Roth. This article will explore the tax ramifications for the employee and employee in the case of employer profit-sharing contributions made in Roth. However, before we get into the Solo 401(k) employer profit-sharing contribution Roth rules, it is important to understand what a Solo 401(k) plan is and how the 2024 Solo 401(k) contribution rules work.
What is a Solo 401(k)?
A Solo 401(k) plan” is an IRS-approved retirement plan, which is designed for business owners who do not have any employees, other than themselves and perhaps their spouse. The Solo 401(k) plan is not a new type of plan. It is essentially a regular 401(k) plan covering only one employee. The Economic Growth Tax Relief and Reconciliation Act of 2001 (EGTRRA) created a strong interest in the Solo 401(k) Plan. EGTRRA added employee deferrals, the loan feature, and Roth contributions to the Solo 401(k) plan making it a far better option for the self-employed or small business owner than a SEP IRA.
Who Can Establish a Solo 401(k) Plan?
The Solo 401(k) plan may be adopted by an individual sole proprietor, or any other business entity, such as an LLC, corporation, or partnership. In general, to be eligible to benefit from the Solo 401(k) Plan, one must meet just two eligibility requirements:
(i) The presence of self-employment activity.
(ii) The absence of full-time employees.
The following types of employees may be generally excluded from coverage:
- Employees under 21 years of age
- Employees who work less than 1000 hours annually or two years of 500 hours or more
- Union employees
- Nonresident alien employees
2026 Solo 401(k) Plan Contribution Rules
Under the 2026 Solo 401(k) contribution rules, a plan participant under the age of 50 can make a maximum annual employee deferral contribution in the amount of $24,500. That amount can be made in pretax, after-tax, or Roth. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) annual profit-sharing contribution. in pretax or Roth, based on the amount of the net Schedule C amount or W-2, as applicable, up to a combined maximum, including the employee deferral, of $72,000.
For plan participants over the age of 50, an individual can make a maximum annual employee deferral contribution of $32,500. That amount can be made in pretax, after-tax, or Roth. On the profit-sharing side, the business can make a 25% (20% in the case of a sole proprietorship or single member LLC) annual profit-sharing contribution, in pretax or Roth, based on the amount of the net Schedule C amount or W-2, as applicable, up to a combined maximum, including the employee deferral, of $80,000 ($77,500 in 2023).
Roth Employer Profit Sharing Contribution & SECURE Act 2.0
In the case of a Solo 401(k), employer profit-sharing contributions are generally based on a percentage of compensation. For a sole proprietor or single-member LLC taxed as a disregarded entity, the contribution is calculated using a special formula that effectively allows up to 20 percent of net Schedule C income. For an S corporation or C corporation owner paid via W-2 wages, the employer contribution can be up to 25 percent of W-2 compensation.
Prior to 2023, all Solo 401(k) employer profit-sharing contributions were required to be made on a pre-tax basis. The business received a tax deduction for the contribution, and the participant did not recognize any current income. Instead, the contribution (and its earnings) would be taxed when distributed in retirement, potentially along with a 10 percent early distribution penalty if taken too soon. Because the IRS would eventually tax these funds at distribution, there was no need to impose taxation when the contribution was made.
That framework changed with the passage of SECURE 2.0 in late 2022. Among its many retirement-related provisions, SECURE 2.0 introduced the ability for 401(k), 403(b), and governmental 457(b) plans to permit vested employer matching and non-elective contributions to be treated as Roth contributions. This provision became effective after enactment, allowing plan sponsors, including Solo 401(k) plans, to offer Roth employer contributions if properly drafted.
As a result, beginning in 2023, a Solo 401(k) participant may elect to have employer profit-sharing contributions made on a Roth basis instead of pre-tax. The business remains eligible to deduct the employer contribution, but the participant must include the Roth employer contribution in taxable income in the year it is made. This immediate taxation is required because qualified Roth 401(k) distributions are generally tax-free, and the IRS must collect the tax upfront rather than at retirement.
New for 2026: Mandatory Roth Catch-Up Contributions for Higher-Income Solo 401(k) Owners
Beginning January 1, 2026, SECURE 2.0 imposes an additional Roth requirement that specifically affects catch-up contributions. If a Solo 401(k) participant is age 50 or older and had prior-year wages exceeding $150,000 from the employer sponsoring the plan, any catch-up contributions must be made on a Roth (after-tax) basis. The $150,000 threshold is indexed for inflation and is measured using prior-year Social Security wages (typically Box 3 of the W-2).
Under this rule, only the catch-up portion of employee deferrals is affected. Standard employee deferrals up to the regular annual limit may still be made on either a pre-tax or Roth basis. However, once the income threshold is exceeded, every dollar of the catch-up contribution must be Roth.
This rule applies to Solo 401(k) plans because they are still 401(k) plans under the tax code. For owners of S corporations or C corporations who pay themselves W-2 wages, the Roth catch-up requirement will clearly apply if the wage threshold is met. While the rule is more nuanced for sole proprietors without W-2 wages, most high-income Solo 401(k) owners should assume Roth catch-up contributions will be required and ensure their plan document supports Roth deferrals.
Importantly, if a Solo 401(k) plan does not offer Roth contributions at all, high-income participants will not be permitted to make catch-up contributions beginning in 2026. This makes Roth-ready plan design a critical consideration for older, higher-income business owners.
Learn More: The New 2026 Solo 401(k) Roth Catch-Up Rule: What High-Income Owners Need to Know
Items to Consider When Making Solo 401(k) Roth Employer Contributions
- Participants must election to designate as Roth.
- Roth employer contributions likely starts five-year clock, if not already started for the year income included.
- Tax reporting. Probably appear on Form W-2, box 1 in year contribution made; maybe Form 1099-R. Not clear whether these amounts count for FICA/Medicare taxes.
- The employee is responsible for taxes; the employer gets a deduction.
- Roth employer contribution shouldn’t be counted as compensation for plan purposes.
- Alternatively, Roth employer plan contribution could be done as in-plan Roth conversation and Form 1099R.
Conclusion
The SECURE Act 2.0 introduced a groundbreaking change by allowing Solo 401(k) employer profit-sharing contributions to be made as Roth contributions. While this new option gives self-employed individuals more flexibility in managing their tax strategy, it also introduces important considerations around timing, taxation, and reporting.
A Roth employer contribution is not tax-deductible, since it is made with after-tax dollars. However, it allows for tax-free growth and tax-free qualified withdrawals in retirement—an advantage for those who expect to be in a higher tax bracket later on. Business owners should weigh the immediate tax cost against the long-term benefit of tax-free income.
As the IRS continues to clarify certain reporting and administrative details, Solo 401(k) owners should work closely with a tax professional to ensure proper compliance and optimize their contributions. The ability to choose between pretax and Roth employer contributions gives self-employed investors greater control and flexibility over their retirement planning—empowering them to invest freely and retire confidently.
Ready to Take Advantage of the New Roth Employer Contribution Rules?
Thanks to the SECURE Act 2.0, Solo 401(k) owners now have more flexibility than ever—allowing employer profit-sharing contributions in Roth. Whether you’re self-employed or running your own small business, understanding how these rules impact your taxes and retirement strategy is crucial.
👉 Schedule a Free Consultation to learn how IRA Financial can help you structure your Solo 401(k) for maximum tax efficiency and long-term growth.
👉 Open a Solo 401(k) Account today and take control of your retirement with flexible contribution options, Roth advantages, and full IRS compliance.
About the Author
Adam Bergman is a tax attorney and the founder of IRA Financial, one of the largest Self-Directed IRA platforms in the United States. He has helped more than 27,000 clients take control of their retirement savings, overseeing over $5 billion in retirement assets. Adam is also the author of nine books focused on helping investors understand and confidently manage their retirement strategies.
