If you're self-employed or own a small business, contributing to a retirement plan can help you save for the future while reducing your taxable income. Depending on the type of plan you have, you may be able to deduct contributions made for yourself, your employees, or both.
Common retirement plans for small businesses include:
- SEP IRAs
- SIMPLE IRAs
- Qualified retirement plans, such as Solo 401(k) plans and profit-sharing plans
Understanding the contribution limits and deduction rules can help you maximize your tax benefits.
SEP IRA Contributions
A Simplified Employee Pension (SEP) IRA allows employers, including self-employed individuals, to make retirement contributions for themselves and their employees.
Who Can Contribute?
- You must be self-employed or an employer.
- Contributions are made by the employer only.
- Employees do not make salary-deferral contributions to a SEP IRA.
2026 Contribution Limit
For 2026, SEP IRA contributions are limited to the lesser of:
- 25% of eligible compensation, or
- $72,000 per participant.
For self-employed individuals, the calculation is based on net earnings from self-employment. Because the calculation requires adjustments for self-employment tax and the retirement plan deduction itself, the final deductible amount may be lower than a simple 25% calculation.
For worksheets and calculation guidance, see IRS Publication 560.
SIMPLE IRA Contributions
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is designed for small businesses, generally those with 100 or fewer employees.
Employee Contributions
For 2026, eligible employees may make salary-reduction contributions of up to:
- $17,000.
Additional catch-up contributions may be available for eligible participants age 50 or older.
Required Employer Contributions
Employers must choose one of the following contribution methods:
Option 1: Matching Contribution
- Match employee contributions dollar-for-dollar up to 3% of compensation.
Option 2: Non-Elective Contribution
- Contribute 2% of compensation for all eligible employees, even if an employee chooses not to contribute to the plan.
Qualified Retirement Plans
Qualified retirement plans include arrangements such as:
- Solo 401(k) plans
- Profit-sharing plans
- Other employer-sponsored qualified plans
Contribution limits vary depending on the type of plan.
Solo 401(k) Plans
A Solo 401(k) can offer higher savings opportunities because the business owner may contribute in two capacities:
- As an employee through salary-deferral contributions
- As an employer through profit-sharing contributions
The combined contribution limits are generally subject to annual IRS limits and compensation restrictions.
Deducting Contributions
For sole proprietors, deductible retirement plan contributions are generally reported as part of the business return and may reduce taxable income.
Contributions Made for Employees
If you contribute to your employees' SEP IRAs, SIMPLE IRAs, or other qualified retirement plans, those contributions are generally deductible as a business expense.
You can typically report these deductions on Schedule C as:
- Pension and profit-sharing expenses, or
- Other business expenses, depending on the situation and software entry method.
Employer retirement contributions can be a valuable deduction because they help employees save for retirement while reducing taxable business income.
Key Takeaways
- SEP IRA contributions are made by the employer and are limited to the lesser of 25% of compensation or $72,000 for 2026.
- SIMPLE IRA plans are generally available to businesses with 100 or fewer employees and allow employee salary-deferral contributions of up to $17,000 in 2026.
- Employers sponsoring a SIMPLE IRA must generally make either a 3% matching contribution or a 2% non-elective contribution.
- Contributions made on behalf of employees are generally deductible as a business expense.
- Self-employed individuals should carefully calculate retirement contributions because special rules apply when determining eligible compensation.