How the contribution limit is actually calculated

Start from net profit, subtract half the self-employment tax, then take 20 percent — not 25, and not a percentage of revenue. irs.gov

Four numbers stand between your revenue and your limit. Three of them are not the ones people expect, and each one is a place where a plausible answer comes out wrong.

Every line, at $100,000 of net profit

Step	How	Result
Schedule C net profit	revenue − business expenses	$100,000
Net earnings from self-employment	net profit × 92.35%	$92,350.00
Self-employment tax	net earnings × 15.3%	$14,129.55
Deductible half of it	self-employment tax ÷ 2	$7,064.78
Net earnings for plan purposes	net profit − deductible half	$92,935.22
Employee deferral	capped at $24,500, and at net earnings	$24,500.00
Employer contribution	net earnings × 20%	$18,587.04
Maximum contribution	deferral + employer, capped at the 415(c) limit	$43,087.04

Solo 401(k) maximum at $100,000 of net profit, under 50, single filer, tax year 2026. Every line computed by this site's engine — constants and sources.

Nothing in that table is typed. It is the same computation the calculators on this site run, printed one line at a time.

The four places it goes wrong

Starting from revenue instead of profit. The base is Schedule C net profit — after business expenses. irs.gov

Forgetting the deductible half of self-employment tax. The base is net profit minus half the self-employment tax. irs.gov That subtraction costs about $7,000 of base at this income, which is $1,400 of contribution room.

Using 25% instead of 20%. The single most common error, and the expensive one.

Why 25% is 20%

For an employee, the employer’s contribution sits on top of their salary. A sole proprietor has no separate employer — the contribution comes out of the same earnings it is a percentage of.

contribution = 25% × (net earnings − contribution)
             = 0.25 / 1.25 × net earnings
             = 20% of net earnings

Treating the deferral as a percentage. It is not. The employee deferral is a flat amount up to the annual limit and does not scale with income at all. irs.gov That is precisely why a solo 401(k) beats a SEP by the widest margin at low income.

The same calculation for a SEP

Step	How	Result
Schedule C net profit	revenue − business expenses	$100,000
Net earnings from self-employment	net profit × 92.35%	$92,350.00
Self-employment tax	net earnings × 15.3%	$14,129.55
Deductible half of it	self-employment tax ÷ 2	$7,064.78
Net earnings for plan purposes	net profit − deductible half	$92,935.22
Maximum contribution	net earnings × 20%, capped at the 415(c) limit	$18,587.04

SEP-IRA maximum at $100,000 of net profit, under 50, single filer, tax year 2026. Every line computed by this site's engine — constants and sources.

Identical for the first five lines, and then it stops. A SEP has only the employer side, which is the entire difference between the two plans expressed as arithmetic.

Where the ceilings come in

Two limits sit above all of this, and for a sole proprietor they arrive together rather than one after another.

The overall contribution limit is $72,000 and the compensation limit is $360,000. irs.gov Twenty percent of the second is exactly the first, which is not a coincidence — the code sets them at 5:1 — so there is no income at which one binds and the other does not.

Net profit	Net earnings	SEP-IRA	SIMPLE IRA	Solo 401(k)	Solo over SEP
$50,000	$46,468	$9,294	$18,394	$33,794	$24,500
$100,000	$92,935	$18,587	$19,788	$43,087	$24,500
$200,000	$185,883	$37,177	$22,576	$61,677	$24,500
$300,000	$284,544	$56,909	$25,536	$72,000	$15,091
$400,000	$383,205	$72,000	$27,800	$72,000	—

Where each ceiling starts to bite — single filer, no state income tax, tax year 2026, under 50. Generated from the same engine the calculators run, not typed in — every constant is listed with its source.

The catch-up contribution, for anyone 50 or over, sits outside the overall limit rather than inside it. That detail is worth $8,000 and is routinely folded in by calculators that treat the ceiling as one number.

Two things that change the answer

Deferrals at a day job. The employee deferral limit is per person across every plan, not per plan. Someone deferring at an employer has that much less solo room, and the employer side is unaffected.

A spouse in the business. A spouse is a second participant in a one-participant plan, not a disqualifying employee — so each can make a deferral, which is the largest single increase in household contribution room available to most couples running a business together.

The order to do it in

Compute the limit last. Net profit is not known until the year is closed, and the employer contribution can be decided after that — the deadlines are asymmetric in a way that helps here, because the employer side is due with the return while the deferral election was due in December.

Which means the practical sequence is: elect the deferral in December on an estimate, then compute the employer contribution in filing season against the real number.