Solo 401(k) Rules for a C Corporation

There is a common misconception that only a sole proprietor can establish a Solo 401(k) plan. However, the truth is that anyone that is self-employed, whether they are a sole proprietor or have a business with no non-owner full-time employees can establish a Solo 401(k). This article will explore the Solo 401(k) rules for a C Corporation so that you better understand how you can save for retirement as a small business owner.

Solo 401(k) plans fall under the broader category of qualified retirement plans, which include various types such as 401(k), cash balance, and defined benefit plans. These plans offer tax advantages provided by the IRS and have compliance requirements to ensure benefits for all participants.

What is a Solo 401(k)?

A Solo 401(k) plan is essentially a 401(k) plan for a business that has no full-time employees other than the business owner(s) and their spouse(s). Having eligible employees restricts the use of a Solo 401(k) and requires a traditional 401(k) plan. It is perfect for any sole proprietor or small business with no full-time employees.

The type of business entity can affect eligibility and contribution limits. A non-owner full-time employee is anyone that does not work more than 1,000 hours during the year or three consecutive years of 500 hours.

What is a C Corporation?

A corporation is formed under the laws of a particular state by filing articles or organization with the Secretary of State in the relevant state. A standard corporation is known as a C Corporation. It conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders. The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This is known as a two-layer of tax or double tax. A C Corporation is not a flow-through entity like an LLC or an S corporation. As a result, it is not the most common entity type for small businesses with no employees.

Ownership of a C Corporation is evidenced through the issuance of stock certificates to shareholders. Shareholders have legal rights to the distribution of corporate profits. An employee of a C Corporation, including any owner, will receive a W-2, which displays the annual income earned from the business. Contributions to a Solo 401(k) can be classified as a business expense for tax purposes.

Contributions can be made up until the tax filing deadline for the corporation.

Eligibility and Requirements

To be eligible for a Solo 401(k) plan, an individual must be a self-employed business owner with no employees other than their spouse. This includes sole proprietors, single-member limited liability companies (LLCs), and other small business owners. The business owner must have self-employment income, which is defined as net earnings from self-employment after deducting self-employment tax and other business expenses. The Internal Revenue Code (IRC) sets the rules and requirements for Solo 401(k) plans, including the contribution limits and eligibility requirements. This makes the Solo 401(k) an attractive option for self-employed individuals looking to maximize their retirement savings while benefiting from significant tax advantages.

Types of Solo 401(k) Contributions for a C Corporation

The most popular benefit of the Solo 401(k) plan is the high annual maximum contributions. It is a profit-sharing plan, but it also has the employee-deferral feature, which will be highlighted below. The plan allows for both profit sharing contributions and maximum employer contributions, making it a versatile option for retirement savings.

Individuals aged 50 and over can make catch up contributions, allowing them to contribute additional amounts beyond the standard limits to enhance their retirement savings. New for 2025 – the “super catch-up,” which allows savers between the ages of 60 and 63 to save even more.

There are generally two types of categories of Solo 401(k)-type contributions: the employee deferral and the profit sharing contribution. Here’s the low-down of each:

Employee Deferral: The majority of employees make pretax employee deferral contributions which are tax deductible. Under the 2025 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 $23,500. That amount can be made in pretax, after-tax or Roth. Plan participants who are at least age of 50 can make a maximum annual employee deferral contribution in the amount of $31,000, which factors in the catch-up contribution of $7,500. If you are between the ages of 60 and 63, that amount is increased to $11,250, for a total of $34,750.

Profit Sharing: Through the role as the employer, an additional contribution can be made to the plan in an amount up to 25% of the participant’s W-2. Employer contributions are made by the business and are also 100% elective but must be made prior to the business filing its tax return. Employer contributions are also known as “profit sharing” contributions and can now be in Roth, in addition to pretax and after-tax. Profit sharing contributions are essentially a percentage of the plan participant’s W-2 amount, guaranteed payment, or net Schedule C amount, depending on your business type.

Total Contribution: The sum of employee deferrals and employer contributions cannot exceed the IRC 415 limit for 2025 which is $70,000 or $77,500 for persons age 50 and older. If you are between 60 and 63, your contributions must not exceed $81,250.

Roth Contributions

Solo 401(k) plans allow for Roth contributions, which are made with after-tax dollars. This means that the contributions are subject to income taxes, but the earnings grow tax-free and are not subject to income taxes when withdrawn in retirement. Roth contributions can be made by both the employee and the employer, and are subject to the same contribution limits as traditional contributions.

The decision to make Roth contributions depends on the business owner’s individual tax situation and retirement goals. For those who anticipate being in a higher tax bracket in retirement, Roth contributions can offer significant tax benefits.

The Solo 401(k) Plan Contribution Rules for a C Corporation

For the 2025 taxable year, a C corporation is required to file IRS Form 1120 (U.S. Corporation Income Tax Return) as well as the state-related tax form by April 15, 2026, or October 15, 2026, if an extension is filed. A business owner that operates his or her business as a C corporation can establish a Solo 401(k) plan for the 2025 taxable year up until the business files Form 1120.

Contributions can be made up until the tax filing deadline, which is typically mid-April, or later if an extension is requested.

Obviously, if you want to take full advantage of the annual contribution limits, you should establish your plan before the end of the year. Get started now to have your plan ready for this year and beyond.

Retirement Plan Administration

Administering a Solo 401(k) plan requires compliance with the IRC and other regulations. This includes maintaining accurate records, filing annual reports with the IRS, and ensuring that the plan is operated in accordance with its adoption agreement. The plan provider, such as a financial institution or third-party administrator like IRA Financial, can assist with plan administration and ensure compliance with regulatory requirements.

The business owner is responsible for making contributions, investing plan assets, and taking distributions in accordance with the plan’s rules and regulations. It’s essential to understand the rules and regulations surrounding Solo 401(k) plans to maximize the benefits and minimize the risks. Proper administration ensures that the plan remains a valuable and compliant retirement savings vehicle.

Conclusion

The Solo 401(k) plan is the most popular retirement plan for the self-employed, including shareholders of a C corporation, that do not have any full-time employees other than the shareholders or their spouses. The plan offers various investment options, allowing participants to choose from a wide range of assets. In addition to high annual contribution options, the plan allows a plan participant to invest in alternative assets, borrow up to $50,000 tax- and penalty-free, max out Roth contributions via the “Mega Backdoor” Roth strategy, plus it has very simple annual administration requirements. The plan can also include contributions made by the business owner’s spouse, enhancing the overall savings potential for the family.

Do you have a C corp and want to start a retirement plan? Take advantage of our free consultation to discuss your options!

Ready to Leverage Your C Corporation with a Solo 401(k)?

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