Solo 401(k) 20% vs 25% Tax year 2026

The self-employed employer contribution is not the 25% rate most articles paste from employee-plan rules.

Wrong vs right Pub 560 math Live calculator

By The PiggyMath Editorial Desk Last updated August 13, 2026 ✓ Dual-checked against published 2026 IRS figures

Finding: Most Solo 401(k) calculators apply a flat 25% employer rate to sole proprietors. For Schedule C filers the correct effective rate is 20% of net earnings after the deduction for one-half of self-employment tax — on $120,000 of profit that overstates the employer share by about $5,600 (or ~$7,700 if they also skip the SE-tax base step). Educational prep only — PiggyMath does not e-file and this is not tax advice.

The wrong rule vs the right rule

Wrong (common): employer contribution = 25% × Schedule C profit (sometimes even before subtracting half of SE tax).

Right (sole proprietor): base = net profit − deductible half of SE tax; employer contribution = 20% × base. That 20% is not a different statute — it is 0.25 ÷ 1.25, because compensation is measured after the contribution. IRS Publication 560 publishes the self-employed rate table for exactly this reason.

Still 25%: an S-corporation owner on W-2 wages — wages are not reduced by the profit-sharing contribution, so 25% of compensation is literally correct.

Figure 1. Worked example — $120,000 Schedule C net profit, sole proprietor, tax year 2026
	Wrong calculator	Correct (Pub 560)	Dollar gap
SE tax (approx.)	~$16,956 on 92.35% of profit		—
Deductible half of SE tax	Often ignored	$8,478	—
Plan compensation base	$120,000 (raw profit)	$111,522	$8,478
Employer rate applied	25%	20% (= 0.25 ÷ 1.25)	—
Employer contribution	$30,000 (25% × profit) or $27,881 (25% × correct base)	$22,304	+$7,696 / +$5,576
Employee deferral (under 50)	Up to $24,500 §402(g) 2026		—
Illustrative total (deferral + employer)	~$54,500 / ~$52,381	~$46,804	Same excess as employer row

Source: PiggyMath modeled estimates using the same Schedule SE / Solo engines as the live calculators (tax-constants-2026.json). Canonical URL: https://piggymath.com/solo-401k-20-vs-25/. Not filing advice.

Figure 2. Employer share by Schedule C profit — wrong 25% of profit vs correct 20% of net earnings (2026)
Net profit	Correct base	Correct employer (20%)	Wrong (25% of profit)	Overstatement
$60,000	$55,761	$11,152	$15,000	$3,848
$80,000	$74,348	$14,870	$20,000	$5,130
$100,000	$92,935	$18,587	$25,000	$6,413
$120,000	$111,522	$22,304	$30,000	$7,696
$150,000	$139,403	$27,881	$37,500	$9,619
$200,000	$185,883	$37,177	$50,000	$12,823

“Wrong” column is the common shortcut: 25% of raw profit. Even a “smarter” wrong tool that uses 25% of the correct base still overstates by exactly one-quarter of the right employer amount (e.g. $5,576 on $120k). Annual additions and the §401(a)(17) compensation cap can bind at high incomes — run the calculator below.

Why 25% becomes 20%

Defined-contribution profit-sharing contributions are limited to 25% of compensation. For an employee, compensation is W-2 pay and the contribution does not reduce that pay for this purpose — so 25% means 25%.

For a sole proprietor, “compensation” for the plan is net earnings from self-employment, and those earnings are reduced by the deductible contribution. If C is the contribution and E is earnings before the contribution:

C = 0.25 × (E − C) → C = 0.25E / 1.25 = 0.20E

Publication 560 therefore tells self-employed people to use the 20% rate table (and to start from net profit reduced by one-half of SE tax). Copying the employee-plan “25%” sentence into a freelancer tool is the error.

2026 limits this page uses

Employee elective deferral: $24,500 [IRS 401(k) limits]
Age 50+ catch-up: $8,000; ages 60–63 enhanced catch-up: $11,250 [IRS catch-up topics]
§415(c) annual additions: $72,000 (catch-up sits on top) [IRS 401(k) limits]
§401(a)(17) compensation cap: $360,000
Social Security wage base (for the SE half-deduction step): $184,500 [SSA 2026 CBB]

Machine-readable copies with source URLs live in data/tax-constants-2026.json. Runtime still mirrors these values in assets/app.js.

Who is affected / who is not

Affected: sole proprietors and single-member LLCs on Schedule C (and partners using the self-employed rate table) who rely on a generic “25% of compensation” calculator.

Not affected by this particular mix-up: S-corp owners whose plan compensation is W-2 wages (25% of wages is the right statement — though a low salary still caps contributions; see the S-corp vs sole proprietor trade-off). Pure employees in a workplace plan.

A second, separate trap — the $24,500 deferral is per person, not per plan — still hits freelancers with a day-job 401(k). The live calculator below subtracts other deferrals.

Same “most tools stop too early” pattern elsewhere: S-Corp payroll vs lost QBI, Form 2210 annualized method, and PTC repayment uncapped in 2026.

Run your numbers (embedded Solo 401(k) calculator)

Same engine as the dedicated Solo 401(k) Contribution Calculator. Defaults to the $120,000 sole-proprietor case from Figure 1. Math stays in your browser — we do not e-file.

Your business

How you're taxed

Schedule C net profit ($) Used if you're a sole proprietor

W-2 wages from your S corporation ($) Used if you take a salary — distributions don't count

You

Your age at the end of 2026

Deferred into another employer's 401(k) this year ($)

Your 2025 W-2 Social Security wages ($)

Your marginal income tax rate (%)

Maximum you can contribute for 2026

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Employee deferral

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Employer contribution

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Catch-up

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Where it comes from

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Income tax saved

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The 20% that everyone writes as 25%

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How the limit grows with earnings

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Two rules that catch people out

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How to cite

Suggested citation line (copy/paste):

PiggyMath Editorial Desk. “Solo 401(k) 20% vs 25%: What Most Calculators Get Wrong (2026).” PiggyMath, 13 Aug. 2026, https://piggymath.com/solo-401k-20-vs-25/. Modeled educational estimates using IRS Publication 560 / Schedule SE math for tax year 2026.

Methodology Full Solo 401(k) tool SEP vs Solo Freelancer estimator

Frequently asked questions

Is a sole proprietor’s Solo 401(k) employer contribution 20% or 25%?

For a sole proprietor or single-member LLC taxed on Schedule C, the effective employer (profit-sharing) rate is 20% of net earnings from self-employment after the deduction for one-half of SE tax. The statute says 25% of compensation, but compensation is reduced by the contribution itself, so 0.25 ÷ 1.25 = 0.20. An S-corporation owner taking a W-2 really does get 25% of wages.

How much do wrong 25% calculators overstate on $120,000 of profit?

Using 2026 Schedule SE math, the correct employer share is about $22,304. Applying 25% to the same net-earnings base yields about $27,881 — roughly $5,576 too high. Skipping the half-SE-tax reduction and taking 25% of raw profit ($30,000) overstates by about $7,696.

What happens if I contribute the wrong higher amount?

An excess contribution generally must be corrected. Leaving it uncorrected can trigger a 6% excise tax for each year it remains. This page is educational prep, not filing advice — confirm corrections with a qualified preparer or IRS Publication 560.

Who is not affected by the 20% vs 25% mix-up?

S-corporation owner-employees whose plan compensation is W-2 wages correctly use 25% of those wages. Employees in a workplace 401(k) are not using the self-employed rate table at all.

Sources

Every formula on this page is checked against an independent implementation before publication. How we check our math →

PiggyMath provides estimates for educational purposes only and is not financial, tax or legal advice. We help you plan and set aside — we do not e-file returns. No Enrolled Agent or CPA has reviewed this page unless separately disclosed with credentials and a review date.