IRS rule could save business owners thousands | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

If you run your own business, you already know how much of your income disappears to taxes every single year. You pay self-employment tax, income tax, and possibly state tax on top of it all, often with very few deductions left standing.

There is a set of IRS rules that could let you shelter tens of thousands of dollars from taxes. These rules apply to retirement plans designed specifically for self-employed people and small business owners just like you.

The best part is that you still have time to act for the 2025 tax year, even if you have not started yet.

The retirement plan that lets business owners defer far more than traditional IRAs

A traditional IRA limits your annual contribution to $7,000 in 2025, or $8,000 if you are 50 or older, according to the IRS. For a business owner earning six figures, that barely makes a dent in your tax bill or retirement savings gap.

“I’m happy to do anything in the world to make it easier for the American public to file their taxes and to get served by us, and to increase compliance. And the only answer to that I know, through my whole life, is technology is the great enabler,” said IRS CEO Frank Bisignano.

The IRS allows self-employed individuals to contribute far more through employer-sponsored retirement plans designed for small businesses. Three specific plans stand out for their higher limits and flexible deadlines.

SEP IRAs allow you to contribute up to $70,000 for the 2025 tax year

A Simplified Employee Pension IRA is one of the most powerful retirement tools available to self-employed professionals. You can contribute up to 25% of your net self-employment income, with a maximum contribution of $70,000 for the 2025 tax year, according to the IRS.

That $70,000 contribution is fully tax-deductible, which means it directly reduces your taxable income for the year.

SEP IRA deadlines you need to know for 2025

You can open and fund a SEP IRA as late as your business tax filing deadline, including any extensions you file. For sole proprietors filing individual returns, the standard deadline for 2025 contributions is April 15, 2026.

If you file a tax extension, you push that deadline all the way to October 15, 2026, and still apply it to 2025. No other retirement account gives you that much flexibility to establish and fund a plan retroactively for the prior year.

Where a SEP IRA falls short

SEP IRAs do not allow catch-up contributions for people 50 and older, unlike Solo 401(k) plans and traditional IRAs. You also cannot make Roth contributions through a standard SEP IRA, which limits your tax diversification options in retirement.

If you have employees, you must contribute the same percentage of compensation to their accounts as you do to your own account.

Solo 401(k) plans give business owners the highest total contribution ceiling.

A Solo 401(k) is available to self-employed individuals or business owners with no full-time employees other than a spouse. You can contribute as both an employee and an employer, which means your total savings potential far exceeds that of a SEP IRA.

2025 contribution limits for Solo 401(k) plans

The employee deferral limit is $23,500 for 2025, on either a pre-tax or Roth basis.
If you are 50 or older, you can add $7,500 in catch-up contributions, bringing your employee side to $31,000.
Individuals aged 60 through 63 qualify for a super catch-up of $11,250, raising the employee total to $34,750.
The employer profit-sharing contribution can reach up to 25% of compensation, capped at $70,000 in total.

A business owner under 50 with $200,000 in net earnings could contribute roughly $60,000 between both sides of the plan. That entire amount is either tax-deductible or, in the case of Roth deferrals, grows completely tax-free for retirement.

Key deadlines for establishing a Solo 401(k)

Your Solo 401(k) plan documents must be signed and executed by December 31, 2025, to make employee deferrals for that tax year. The actual contributions can be deposited later, up to your business tax filing deadline, including any extensions you file.

For S corporations and partnerships, the base filing deadline is March 16, 2026, with extensions pushing it to September 15, 2026. Sole proprietors follow the individual return deadline of April 15, 2026, which also extends to October 15, 2026.

Cash balance plans let high earners shelter over $200,000 per year

If you are a high-income business owner in your 50s or 60s, a Solo 401(k) or SEP IRA may still feel insufficient. A cash balance defined benefit plan allows contributions that increase significantly with age, often exceeding $200,000 per year.

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Business owners aged 60 and older can contribute well over $250,000 annually in pre-tax contributions through these plans. Many business owners pair a cash balance plan with a 401(k) to maximize total tax-deferred savings in a single year.

Important considerations before opening a cash balance plan

Cash balance plans require an actuary to design and administer, adding annual costs ranging from $2,000 to $5,000.
You commit to a specific annual funding level, which means contributions are not optional in years with lower revenue.
If you have employees, you may need to make contributions on their behalf as well, which can increase the total annual cost.

These plans work best for established businesses with consistent income and owners who want to increase their retirement savings.

Cash balance plans unlock powerful six-figure tax-deferred contributions for high earners, but come with strict funding commitments and added administrative costs.

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The SECURE 2.0 Act created new tax credits that offset the cost of starting a plan.

Congress passed the SECURE 2.0 Act in 2022 to encourage more small businesses to offer retirement plans to employees. If you have 50 or fewer employees, you can claim a tax credit equal to 100% of your plan startup costs, up to $5,000 per year, for the first three years, according to the IRS.

You may also qualify for an employer contribution credit of up to $1,000 per employee per year for up to 5 years. An additional $ 500-per-year credit is available for three years if your plan includes an automatic enrollment feature.

What the combined credits look like in practice

A business with 10 eligible employees could receive up to $5,000 in startup credits, $10,000 in contribution credits, and $500 in auto-enrollment credits. Over three to five years, that adds up to $15,500 or more in direct dollar-for-dollar reductions to your federal tax bill.

Owner-only businesses without non-highly compensated employees do not qualify for the startup credit on a Solo 401(k) plan. You should work with a tax professional to determine which credits apply to your specific business structure and employee count.

Common retirement plan mistakes that cost business owners money

The biggest mistake is simply doing nothing and letting another tax year pass without properly sheltering your business income. You lose the ability to make contributions for a tax year once all filing deadlines, including extensions, have fully expired.

Other costly missteps to watch for;

Choosing a SEP IRA when a Solo 401(k) would allow higher total contributions, especially if you are over 50 years old.
Failing to establish a Solo 401(k) by December 31 of the contribution year locks you out of employee deferrals entirely.
Ignoring the Roth option inside a Solo 401(k), which allows your contributions to grow and be withdrawn completely tax-free.
Overlooking SECURE 2.0 tax credits that could reimburse nearly all your plan setup and administration costs for years.
Contributing inconsistent percentages for employees can trigger IRS nondiscrimination violations and potential plan disqualification.

Each of these mistakes has a straightforward fix, but only if you act before the relevant IRS deadlines have passed.

Practical steps you can take now to reduce your 2025 tax bill

You do not need to figure this out alone, but you do need to start the process before the year ends.

Your action plan before December 31, 2025

Review your projected 2025 net self-employment income with your accountant to determine maximum allowable contribution amounts.
If you want a Solo 401(k), sign the plan documents before December 31, 2025, to preserve your employee deferral eligibility.
If a SEP IRA better fits your situation, you have until your tax filing deadline, including extensions, to open and fund it.
Ask your tax professional whether a cash balance plan could work for you if you are over 50 and have a consistent, high income.
Check your eligibility for SECURE 2.0 startup credits, employer contribution credits, and auto-enrollment credits with your CPA.

The IRS designed these rules to reward business owners who invest in their own retirement and their employees’ futures. Your job is to make sure you are actually using them before another tax year slips by without the savings you earned.