The single member LLC is one of the most popular vehicles for establishing a business. Assuming you qualify, the Solo 401(k) plan is the best option for your retirement planning needs. This article will explore how the Solo 401(k) rules work specifically for a single member LLC.

Obtaining an employer identification number (EIN) is essential for opening a Solo 401(k) and fulfilling tax requirements.

What is a Single Member LLC?

A Limited Liability Company (LLC) is an entity created by state statute. An LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and elects to be treated as a corporation. An LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and affirmatively elects to be treated as a corporation. An LLC with one owner is often referred to as a single-member LLC and is treated as a disregarded entity for federal income tax purposes.  However, for employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.

Self-employment tax needs to be considered when determining the net profit that impacts allowable contributions to a Solo 401(k).

The single member LLC’s activities should be reflected in its owner’s federal tax return. If the owner is an individual, the activities of the LLC will be reflected on:

• Form 1040 or 1040-SR Schedule C, Profit or Loss from Business (Sole Proprietorship)
• Form 1040 or 1040-SR Schedule E, Supplemental Income or Loss
• Form 1040 or 1040-SR Schedule F, Profit or Loss from Farming

For Solo 401(k) plan purposes, only a business may adopt a 401(k) plan.  Hence, the single member LLC will need to file a Schedule C.

What is a Solo 401(k) Tax-Advantaged Retirement Account?

The Solo 401(k) plan is not a new type of 401(k) plan. Also known as an individual 401(k) or self-employed 401(k), it is a retirement plan that must be adopted by a business that does not have any non-owner full-time employees.

The primary purpose of a Solo 401(k) is to provide a retirement savings option for self-employed individuals and small business owners. Contributions to a traditional Solo 401(k) allow account holders to claim an immediate tax break by reducing their taxable income for that year. It is perfect for any sole proprietor or small business with no full-time employee. Any business that does not have a non-owner (excluding the owner’s spouse) working more than 1,000 hours annually or three consecutive years of 500 hours may establish a Solo 401(k) plan.

Definition and purpose of a Solo 401(k) plan

The primary purpose of a Solo 401(k) plan is to offer a flexible and high-contribution retirement savings option. This allows business owners to save significantly for their future while simultaneously reducing their taxable income. By leveraging the benefits of the plan, such as the loan option or after-tax Roth contributions, business owners can take advantage of higher contribution limits compared to other retirement plans, making it an attractive option for those looking to maximize their retirement savings.

Eligibility Requirements

To qualify for a Solo 401(k), the business must be operated by the individual alone or with their spouse, and it must generate income. The business can be structured in various forms, including a sole proprietorship, single member LLC, corporation, or partnership. Additionally, the individual must meet the requirements set forth by the Internal Revenue Service (IRS). These requirements ensure that the plan is used appropriately by those who are truly self-employed or running a small business without full-time employees, other than a spouse.

Who qualifies for a Solo 401(k)?

Essentially, you need to adhere to two rules. First, you must have self-employment income, such as a consultant, gig worker, or even a doctor. Secondly, you must not employ any full-time employees, other than other owners, and the owners’ spouse(s).

These qualifications ensure that the Solo 401(k) plan is accessible to a wide range of business owners, providing them with a powerful tool for retirement savings.

Types of Solo 401(k) Contributions and Contribution Limits

The most popular benefit of the Solo 401(k) plan is the high annual maximum contributions which can be reached much faster than a SEP IRA because popular small business plan is strictly a profit-sharing plan. The Solo 401(k), on the other hand, is a profit-sharing plan, but it also has the employee deferral feature, which will be highlighted below.

The contribution limits for a Solo 401(k) plan are determined based on net self-employment income and are subject to annual limits set by the IRS. These limits are designed to allow business owners to maximize their retirement savings while taking advantage of significant tax benefits. Understanding these limits is crucial for making the most of your solo 401(k) plan.

There are generally two types of categories of contributions:

Employee Deferral Contribution: All 401(k) plans feature employee deferral, which is the amount one can contribute as an employee of the plan. The contributions can be made in pretax or Roth and must stay within the annual contribution limits. Roth contributions are made with after-tax dollars, which allows for qualified, tax-free withdrawals during retirement. For 2025, one can contribute up to $23,500, plus, if he or she is at least age 50, an additional $7,500 catch-up contribution can be made for a total of $31,000. Starting in 2025, those aged 60 to 63 can contribute an additional $11,250, which is 50% more than the standard catch-up.

It is important to make contributions by the tax filing deadline, which is April 15, 2025, to maximize retirement savings for the tax year.

Employer Profit Sharing Contribution: Through the role of the employer, an additional contribution can be made to the plan in an amount up to 20% in the case of a single member LLC (Schedule C taxpayer).  The business makes employer contributions which are also 100% elective but must be made before the business files its tax return. Profit-sharing contributions must be made pretax but can be converted to Roth so long as your plan documents permit. Employer contributions are a percentage of the plan participant’s W-2 amount, guaranteed payment, or net Schedule C amount, depending on your business type.

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 aged 50 and older, or $81,250 if between the ages of 60 and 63.

These contribution limits are subject to change, so it’s important to consult with a financial advisor or tax professional to determine the specific limits applicable to your Solo 401(k) plan. By understanding and maximizing these limits, you can significantly boost your retirement savings while enjoying the tax advantages offered by the solo 401(k) plan.

When are Solo 401(k) Contributions Due for a Single Member LLC According to the IRS?

An LLC reports its business income using Schedule C, which is a schedule to the Individual Income Tax Return (Form 1040). A business owner who operates his or her business as a single member LLC can establish a Solo 401(k) plan for the taxable year up until taxes are filed, generally April 15, or, if an extension is filed, October 15. Both profit-sharing and employee deferral contributions can now be made to the plan using those deadlines. Before SECURE Act 2.0, only employee deferrals could be made after the taxable year was over (i.e. December 31).

Summary

The Solo 401(k) plan has become one of the most popular retirement plans for the self-employed. For single member LLC business owners, the plan offers massive tax and retirement advantages – the ability to contribute up to $70,000 or $77,500 for 2025, a $50,000 tax-free loan option, Roth sub-account and a wide array of investment choices. One should work with a financial advisor to determine the best plan for your specific situation.