Guide
Best Retirement Plans for Small Business Owners
An owner with no employees usually chooses between a Solo 401(k), which allows both employee deferrals and employer contributions, and a SEP-IRA, which is simpler and can be opened as late as the tax return due date including extensions. Businesses with up to 100 employees often start with a SIMPLE IRA, which must be set up by October 1, and move to a 401(k) as they grow. Owners who want to put away more than a defined contribution plan allows can look at a defined benefit plan, which needs an actuary.
A retirement plan is one of the few tax deductions that also builds wealth for the owner. The right plan depends on whether you have employees, how steady your profits are, and how much paperwork you are willing to take on. Contribution limits change every year, so we link to the IRS pages for the current year's figures rather than quoting them. The rules below reflect IRS guidance as of September 2026.
SEP-IRA (Simplified Employee Pension)
Best for: Self-employed owners and small businesses with variable profits who want minimal paperwork
The IRS says a business of any size, including a self-employed person, can establish a SEP. Only the employer contributes, and it must contribute the same percentage of pay for every eligible employee. A SEP can be set up, and funded, as late as the due date including extensions of the business's income tax return for the year. Employers may choose to accept Roth contributions, and there is no annual filing requirement for the employer.
- Employer contributions only, same percentage for all eligible employees
- Can be opened and funded by the return due date, including extensions
- No Form 5500 filing
Solo 401(k) (one-participant 401(k))
Best for: Owners with no employees other than a spouse who want to make both employee and employer contributions
The IRS describes the one-participant 401(k) as covering a business owner with no employees, or the owner and spouse. The owner can make elective deferrals up to 100% of compensation, up to the annual deferral limit, plus employer contributions of up to 25% of compensation, within the overall annual limit. No nondiscrimination testing is needed without common-law employees, but Form 5500-EZ is generally required once plan assets reach $250,000 at year-end.
- Employee deferrals plus employer contributions
- Owner and spouse only
- Form 5500-EZ once assets reach $250,000
SIMPLE IRA
Best for: Businesses with up to 100 employees that want a low-cost plan with employee deferrals
A SIMPLE IRA is available to businesses with generally 100 or fewer employees and must be established by October 1 to be effective for the year. The employer must either match employee deferrals up to 3% of compensation or make a 2% nonelective contribution for every eligible employee. The employer cannot maintain any other retirement plan at the same time, and withdrawals within the first two years of participation can face a 25% additional tax instead of 10%.
- Set up by October 1
- 3% match or 2% nonelective contribution
- No other plan allowed alongside it
401(k) plan for a growing team
Best for: Businesses with employees that want higher deferral limits and plan design flexibility
A traditional 401(k) lets employees defer more than a SIMPLE IRA and allows vesting schedules and profit-sharing features, but it is subject to nondiscrimination testing and annual Form 5500 reporting. Under SECURE 2.0, most 401(k) plans established on or after December 29, 2022 must automatically enroll eligible employees starting with 2025 plan years, with exceptions for new businesses and small businesses. Small employers can claim startup and auto-enrollment credits to offset the cost (see below).
- Higher employee deferral limit than a SIMPLE IRA
- New plans generally must auto-enroll employees
- Startup credits can cover much of the first three years' cost
Profit-sharing plan
Best for: Owners who want discretionary employer contributions that can change year to year
The IRS describes profit-sharing plans as allowing flexible contributions that can vary each year, up to 25% of compensation and within the overall annual limit. Profit-sharing is often combined with a 401(k) so employees can defer and the employer can decide on a contribution after the year's results are known.
- Contributions can vary or be skipped
- Often paired with a 401(k)
Defined benefit plan
Best for: High-earning owners, often in their 50s or 60s, with steady profits
A defined benefit plan promises a set retirement benefit, and an actuary calculates the contribution needed each year to fund it. Because the limit applies to the annual benefit rather than to contributions, required contributions can be much larger than in a SEP or 401(k) for older owners. The trade-off is cost and commitment: the actuary sets a required contribution each year, generally paid in quarterly installments, and the plan needs annual reporting.
- Contribution set by an actuary
- Potentially much larger deductions for older owners
- Required annual funding and higher administration cost
Side-by-side comparison
| Plan | Who contributes | Setup deadline | Annual IRS filing |
|---|---|---|---|
| SEP-IRA | Employer only | Tax return due date, including extensions | None for the employer |
| Solo 401(k) | Owner as employee and employer | Generally the tax return due date, including extensions | Form 5500-EZ once assets reach $250,000 |
| SIMPLE IRA | Employees and employer | October 1 | None for the employer |
| 401(k) | Employees and employer | Generally the tax return due date, including extensions | Form 5500 series |
| Defined benefit | Employer, as the actuary determines | Generally the tax return due date, including extensions | Form 5500 series |
Tax credits for starting a plan
Small employers can claim a credit for the costs of starting a SEP, SIMPLE IRA or qualified plan such as a 401(k) for each of the first three years. The IRS says businesses with 50 or fewer employees can claim 100% of eligible startup costs and those with 51 to 100 employees can claim 50%, with the credit capped at the greater of $500 or up to $5,000 a year. A separate $500 credit is available for each of three years for adding automatic enrollment, and an employer contribution credit of up to $1,000 per participant phases down over five years. To qualify, the business can have no more than 100 employees who earned at least $5,000, and at least one non-highly compensated employee must participate. The credits are claimed on Form 8881.
What a retirement plan does not do
Contributions you make for yourself as a sole proprietor or partner reduce income tax, but they do not reduce self-employment tax: IRS Publication 560 has you deduct them on Schedule 1 of Form 1040, not as a business expense on Schedule C, and they are figured from net earnings after self-employment tax. If lowering self-employment tax is the goal, see our guide to ways to reduce self-employment tax. And because plan deadlines differ, from October 1 for a SIMPLE IRA to the extended return due date for a SEP, the best time to decide is during the year rather than at tax time. Haigler CPA Group reviews plan choices as part of tax planning.
Sources
- IRS: Simplified Employee Pension plan (SEP)
- IRS: One-participant 401(k) plans
- IRS: SIMPLE IRA plan
- IRS: Retirement plans for self-employed people
- IRS Publication 560, Retirement Plans for Small Business
- IRS: Retirement plans startup costs tax credit
- IRS: Notice 2024-2, miscellaneous changes under SECURE 2.0
The information on this site is general in nature and is not tax, legal, or accounting advice for your situation. Tax law changes and the right answer depends on facts we would need to review with you. Please speak with a qualified professional before acting on anything you read here.
Questions people ask about this
What is the best retirement plan for a self-employed person with no employees?
Usually a Solo 401(k) or a SEP-IRA. A Solo 401(k) allows both employee deferrals and employer contributions, which often lets you put away more at lower income levels. A SEP is simpler and can be opened as late as the tax return due date, including extensions.
Can I still open a SEP-IRA for 2026 after the year ends?
Yes. The IRS says a SEP can be established and funded as late as the due date, including extensions, of the business's income tax return for the year.
What is the deadline to start a SIMPLE IRA?
A SIMPLE IRA generally must be set up by October 1 of the year it will take effect.
Is there a tax credit for starting a retirement plan?
Yes. Eligible small employers can claim a startup cost credit for three years, 100% of eligible costs for businesses with 50 or fewer employees and 50% for 51 to 100, capped at the greater of $500 or up to $5,000 a year, plus a $500 annual credit for adding automatic enrollment.
Do I need to include employees in my SEP?
Yes, if they are eligible. The IRS says employees who are at least 21, have worked for you in at least three of the last five years and earned the minimum compensation amount must receive the same percentage contribution you make for yourself.
Keep reading
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