Your side business is the employer
A retirement plan is sponsored by an employer, and for tax purposes a self-employed person is their own employer. A sole proprietorship with no separate entity qualifies, as does a single-member LLC or an S corporation you own. The plan can cover you, and your spouse if they work in the business.
Everything the plan does is measured against the side business, not your job:
- The pay the plan counts is your earned income from the side business, or your W-2 wages from it if it is a corporation. Your day-job salary does not count.
- Years of service mean years in the side business.
- The deduction goes against the side business's income.
Your employer is an unrelated business, so its employees do not make your plan any less solo. See who can have a solo cash balance plan.
What is shared and what is separate
| Limit | How it applies | 2026 |
|---|---|---|
| 401(k) and 403(b) salary deferrals | One limit per person, across every employer | $24,500, plus a catch-up from 50 |
| Total defined contribution additions (IRC 415(c)) | Separately for each unrelated employer | $72,000 per employer |
| Cash balance plan benefit (IRC 415(b)) | Separately for each unrelated employer, based on that employer's pay | $290,000 a year of benefit, or 100% of pay if lower |
| Deduction for the self-employed | Up to your earned income from the side business | Depends on profit |
Salary deferrals: one limit for you
The elective deferral limit under IRC 402(g) follows you, not the employer. In 2026 you can defer $24,500 in total across all your 401(k) and 403(b) plans, plus $8,000 from age 50 or $11,250 at ages 60 to 63. The catch-up is counted once too.
If you already defer the full amount at your job, a Solo 401(k) in your side business cannot take more deferrals. It can still take employer contributions from the side business, because those fall under the separate per-employer limit.
Employer contributions: a limit for each employer
The $72,000 limit on total additions to defined contribution plans applies employer by employer. Plans of unrelated employers are not added together. So what your employer puts into its 401(k) for you does not reduce what your side business can put into its own Solo 401(k).
Once the side business also sponsors a cash balance plan, its own 401(k) employer contribution is generally held to 6% of side-business pay, under the combined deduction limit. Your employer's plan plays no part in that test. See using a cash balance plan with a Solo 401(k).
The cash balance plan is sized by the side business
A cash balance plan in your side business has its own $290,000 benefit limit, unaffected by any pension at your job. But every other limit comes from the side business:
- Pay. The lifetime benefit cannot exceed 100% of your average pay from the side business for your best three consecutive years. A side business earning $60,000 supports a much smaller plan than one earning $300,000.
- Service. The pay limit phases in over ten years of service with the side business. A consulting practice in its second year is held to a fraction of it.
- Income. A self-employed owner cannot deduct more across all the side business's plans than its earned income, before those contributions.
For example, suppose your day-job wages are above the Social Security wage base of $184,500, and your side business nets $150,000. You owe only the Medicare part of self-employment tax on the side income, so earned income before contributions is about $147,991. That is the most you could deduct across the side business's plans in a year, even at an age where the cash balance limit alone would be higher, such as about $260,000 at 55.
In practice, people with a large, steady side income get the most from a plan. The calculator runs the rules on your own figures.
When the side business is not unrelated
Everything above assumes the side business and your employer are unrelated. Two common cases where they may not be:
- You are paid through your own company for work at a practice or firm where you are also a partner or shareholder. Your company and the practice may form an affiliated service group, and the practice's employees would count.
- You own 80% or more of another business with employees, alone or with family.
Moonlighting shifts at a hospital you have no ownership in, or advising companies where you hold a small equity stake, do not usually raise this. If you are unsure, ask before you adopt a plan.
Who this is for
The pattern is common among:
- physicians and CRNAs with a hospital job and 1099 income from locum work, moonlighting, expert witness work or medical directorships
- software engineers and product leaders who advise or consult alongside a salaried role
- corporate directors paid board fees as independent contractors
- consultants who keep a practice going next to a part-time or full-time job
A few practical points apply to all of them. A self-employed owner makes a 401(k) deferral election by December 31, though a sole owner of an unincorporated business has until the tax filing date, without extensions, in the plan's first year. The cash balance plan itself can be adopted as late as the business's tax return due date, with extensions. See cash balance plan deadlines. And a few states, including Pennsylvania and New Jersey, do not let the self-employed deduct these contributions; see states that tax retirement contributions.