Can I Claim SEP-IRA / Solo 401(k) Contributions as a Business Expense in United States?
Yes, SEP-IRA and Solo 401(k) contributions are fully deductible. SEP-IRA: up to 25% of compensation, max $72,000 for 2026 ($70,000 in 2025). Solo 401(k) allows up to $72,000 for 2026 plus the catch-up for age 50 and over ($8,000 in 2026), often higher than SEP at modest incomes due to the employee deferral.
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What Internal Revenue Service (IRS) says
IRC Section 408(k) governs SEP-IRA; Section 401(k) plus Section 415(c) cap at $69,000 (2024) for Solo 401(k). Contributions are deductible against business income; growth is tax-deferred. Distributions in retirement are taxed as ordinary income. For 2026 the limit for employee deferrals to a 401(k) is $24,500 and the section 415(c) overall limit is $72,000 ($70,000 in 2025). An employer SEP contribution cannot exceed the lesser of 25 percent of the employee's compensation or $72,000. Elective deferrals are not permitted in a SEP. A SEP can be set up and funded as late as the due date of the return, including extensions, but a 401(k) plan generally has to be adopted by the end of the tax year for employee deferrals.
When you can claim
- SEP-IRA: 25% of net SE earnings (after 1/2 SE tax adjustment), up to $69,000
- Solo 401(k): $24,500 employee deferral (2026) + 25% employer × profit, up to $72,000 combined (2026)
- Catch-up: extra $8,000 if age 50 or over in 2026, and $11,250 for ages 60 to 63 (Solo 401(k))
- Roth Solo 401(k): same limits, after-tax (no deduction but tax-free growth)
- Spouse working in the business, who can defer their own salary into the same Solo 401(k)
When you cannot claim
- Contributions exceeding the annual cap
- Contributions exceeding 25% of compensation
- Late deposits (general SEP deadline = tax filing deadline + extension)
- Employee deferrals into a SEP, which the rules do not allow
Good to know
Pro tip: For owner-only businesses, Solo 401(k) usually beats SEP-IRA by allowing the $23k employee deferral on top of the 25% employer contribution. At $80k net SE income, Solo 401(k) lets you contribute ~$43,000 vs ~$15,000 in SEP.
Important: If the business has employees, a SEP must cover eligible employees at the same percentage as the owner, and Solo 401(k) is available only to owners and spouses. Check these rules before opening a plan.
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