IRS 2027 401(k) limit of $25,500: Compute Your Solo 401(k) Maximum From the Books, Record It as a Draw Not an Expense, and Sign the Deferral Election by December 31

The IRS set the 2027 401(k) limit at $25,500 on November 12, 2026, up $1,000, and the total contribution cap at $75,000. For a solopreneur with a solo 401(k), the number that matters is not the headline but your net self-employment earnings from the books, because the employer piece is 20 percent of that figure.

Most coverage of the announcement lists the limits and stops. This article does the part a self-employed owner actually has to do in the next seven weeks: pull the right profit number out of QuickBooks, run the self-employed computation, decide how much to elect before December 31, and record the deposit so Schedule C stays right.

Why now: the IRS published the 2027 limits on November 12, 2026

On 2026-11-12 the IRS issued IR-2026-136, raising the employee deferral limit for 401(k), 403(b), governmental 457 and Thrift Savings plans to $25,500 for 2027 from $24,500 in 2026. The age 50 catch-up rises to $8,500, the age 60 to 63 catch-up to $11,750, and the IRA limit stays at $7,500. The release points to Notice 2026-66 for the full table. Practitioner analysis of that notice published the same day puts the overall defined contribution cap at $75,000 and the compensation limit at $375,000 (Current Federal Tax Developments, 2026-11-12).

The timing matters for one reason. Under Publication 560, a self-employed owner's employee deferrals "must be elected by the end of the tax year," even though the money can be deposited as late as the return due date with extensions. The 2026 election is due December 31, 2026. The 2027 limits are what you build next year's monthly set-aside around. Both decisions need the same input: an honest net profit figure from the books.

The 2026 and 2027 numbers a solo 401(k) owner actually uses

A solo 401(k), which the IRS calls a one-participant plan, has two sides. You contribute as the employee, up to the deferral limit, and the business contributes for you as the employer. The IRS one-participant 401(k) page defines a self-employed owner's compensation as net earnings from self-employment after deducting both one-half of your self-employment tax and contributions for yourself. That second deduction is circular, which is why Publication 560's rate table turns a 25 percent plan rate into 20 percent of net earnings after the self-employment tax reduction.

Item	2026	2027
Employee deferral limit	$24,500	$25,500
Catch-up, age 50 and over	$8,000	$8,500
Catch-up, ages 60 to 63	$11,250	$11,750
Overall cap, employee plus employer, before catch-up	$72,000	$75,000
Employer rate on net earnings, sole proprietor	20 percent	20 percent
Social Security wage base used in the SE tax step	$184,500	$192,300
IRA limit	$7,500	$7,500

Two of these figures do the real work for a one-person business: the deferral limit and the overall cap. The compensation limit of $375,000 rarely binds, and the wage base only changes the self-employment tax step for owners above it. The 2027 wage base comes from the Social Security Administration's October announcement, which we covered in the 2027 wage base article.

Compute your maximum from the books, not from the headline

Start from the number that will become Schedule C line 31: net profit. In QuickBooks Online that is the Profit and Loss report for January 1 through today, on the basis you file, with the owner's personal spending and any draws coded as expenses taken back out. If the bank feed has been auto-categorizing for eleven months without review, do that cleanup first. Every dollar of misposted expense understates net profit, which understates both self-employment tax and the contribution you are allowed to make.

Then run six steps. The rates come from the IRS self-employment tax page and Publication 560.

1. Multiply net profit by 92.35 percent to get earnings subject to self-employment tax.
2. Apply 12.4 percent Social Security up to the wage base ($184,500 for 2026) and 2.9 percent Medicare on the full amount. Add them for self-employment tax.
3. Take half of that tax. This is the deductible half, and it is the only reduction that goes into the plan computation. The 0.9 percent Additional Medicare Tax is figured on a separate form and is not part of it.
4. Subtract the half from net profit. This is your net earnings for plan purposes.
5. Multiply by 20 percent for the maximum employer contribution.
6. Add your employee deferral, up to the year's limit, and check the total against the overall cap. Catch-up contributions sit on top of the cap.

Example 1: $120,000 of net profit

Earnings subject to self-employment tax are $110,820. Social Security is $13,741.68 and Medicare is $3,213.78, so self-employment tax is $16,955.46 and the deductible half is $8,477.73. Net earnings for the plan are $111,522.27, and 20 percent of that is $22,304.45 of employer contribution. Add the $24,500 deferral and the 2026 maximum is $46,804.45, well under the $72,000 cap.

Hold the profit flat for 2027 and the only thing that changes is the deferral: $25,500 plus $22,304.45 is $47,804.45. The headline increase of $1,000 is the entire increase for this owner. To fund it evenly, the 2027 set-aside is $3,983.70 a month.

Example 2: $300,000 of net profit

Earnings subject to self-employment tax are $277,050. Social Security stops at the wage base, so it is $22,878.00, and Medicare is $8,034.45. Self-employment tax is $30,912.45 and the deductible half is $15,456.23. Net earnings for the plan are $284,543.77, and 20 percent is $56,908.75. Add the $24,500 deferral and the formula says $81,408.75, but the 2026 cap is $72,000, so the employer piece is cut to $47,500.

For this owner the 2027 story is different. The cap rises to $75,000 and the deferral to $25,500, so the employer piece can be $49,500. The extra room is $3,000, not $1,000, and all of it lands on the employer side. At age 50 or older the 2027 total is $83,500. At 60 to 63 it is $86,750.

The gap between the two examples is the whole point of running the calculation instead of reading the press release. Under the cap, the increase you feel is the deferral bump. At the cap, you get the full $3,000.

One more thing the calculation tells you. Both pieces are deducted on Schedule 1 of Form 1040, so they reduce income tax, not self-employment tax. In example 1, at a 22 percent marginal rate, the contribution is worth roughly $10,300 of federal income tax, and the $16,955 of self-employment tax is unchanged. Where the brackets land next year is in our 2027 inflation adjustments article.

Record it as a draw, not an expense, and sign the election by December 31

Here is the bookkeeping mistake that undoes the calculation. The Schedule C instructions for line 19 say that if the plan includes you as a self-employed person, your own contributions go on Schedule 1, line 16, not on Schedule C. Publication 560 says the same for SEP contributions. So a solo 401(k) deposit from the business checking account is not a business expense for a sole proprietor. It is profit moving to the owner.

In QuickBooks Online, record the deposit as a debit to Owner's Draw, an equity account, and a credit to the bank account. Polarity matters here: an owner's draw is a debit that reduces equity, and it never touches the Profit and Loss. If the transaction was auto-categorized to a retirement or payroll expense account, reclassify it with a journal entry that debits Owner's Draw and credits the expense account. Leaving it on the P and L understates net profit, understates self-employment tax, and, because the plan computation starts from net profit, understates the contribution you were allowed to make in the first place.

The treatment flips if you run an S corporation. There the owner is a W-2 employee. Deferrals come out of payroll by December 31 and sit in a 401(k) payable liability until deposited, and the employer contribution, 25 percent of W-2 wages, is a deductible expense of the corporation. Net profit on the P and L does not enter the computation at all. If you changed entity type during 2026, the computation changes with it from the conversion date.

The election is a document, not a deposit

For a sole proprietor, compensation is deemed available on the last day of the year, and Treasury regulation 1.401(k)-1(a)(6)(iii) says a self-employed individual may not make a cash or deferred election for a sole proprietorship taxable year after the last day of that year. Publication 560 states it plainly: the deferrals must be elected by the end of the tax year and can then be made by the return filing deadline, including extensions. Write the election, date it on or before December 31, 2026, state the amount or percentage, and keep it in the plan file. The deposit can follow in 2027.

There is one exception. SECURE 2.0 section 317 lets a sole proprietor with no employees who is adopting a 401(k) for the first time adopt the plan and make first-year deferrals as late as the return due date without extensions, which is April 15, 2027 for 2026. Publication 560 confirms that a sole proprietor with no employees can adopt a plan after the end of the tax year for this purpose. It covers the first plan year only.

Common mistakes and limits

• Using 25 percent instead of 20 percent for the employer piece on Schedule C income. The 25 percent rate belongs to W-2 wages.
• Electing a deferral larger than the year's earned income. The election cannot exceed compensation, and a thin December can leave the elected amount unsupported.
• Counting the deposit as an expense and then wondering why the P and L shows less profit than the tax return.
• Forgetting Form 5500-EZ. The IRS requires it when a one-participant plan holds $250,000 or more in assets at year end, a point-in-time test on December 31, not a flow measure.
• Assuming the mandatory Roth catch-up rule applies. It is keyed to prior-year FICA wages from the employer sponsoring the plan, and a sole proprietor with only self-employment income has no FICA wages. An S corporation owner's W-2 can trigger it. Check the plan document before relying on either answer.
• Treating these examples as tax advice. State income tax, a spouse's wages, a second business, or a defined benefit plan alongside the 401(k) all change the answer, and the figures here use the 2026 wage base.

Accounting controls: source data, calculation, review, and the decision

Treat the contribution like any other year-end number that someone could later challenge. Separate the four layers.

Source data. The year-to-date Profit and Loss from QuickBooks Online on the basis you file, the bank and card feeds reconciled through the latest statement, the 1099-K and 1099-NEC income you expect to receive tied to recorded sales, and the equity register showing every owner draw. Net profit is a flow measure for January 1 through December 31. The plan balance for the Form 5500-EZ test is a point-in-time balance on December 31. Don't mix them.

Deterministic calculation. The six steps above, run on the source data with the year's wage base, deferral limit, and overall cap as inputs. Same inputs, same answer, every time. Keep the worksheet with the plan file so next year's calculation can be compared line by line.

Reviewer checks. Someone, you or your accountant, ties net profit on the worksheet to the P and L, confirms no retirement deposit sits in an expense account, confirms the employer piece used 20 percent and not 25, confirms the total does not exceed the cap, and confirms the signed election is dated on or before December 31 and does not exceed earned income. For an S corporation, the reviewer ties deferrals to the payroll register instead.

Decision owner. How much to elect, and whether to fund the employer piece at all, is the owner's decision, made against cash. The deposit is due by the return due date including extensions, so the question is whether the business will have the cash between January and October 2027 without starving the January 15 estimated tax payment. A monthly check of net profit against cash is what makes that answer obvious instead of a guess.

If you keep more than one entity, or you are an accountant doing this for thirty Schedule C clients, the work is the same calculation repeated on thirty clean P and Ls. FinBoard pulls each QuickBooks Online company into one place and reports net profit to date by entity with the equity and expense accounts visible side by side, so the draw-versus-expense check and the net profit input take minutes per client instead of an afternoon. See how FinBoard reports net profit across every QuickBooks company.

Frequently Asked Questions

What is the 2027 401(k) limit for a solo 401(k)?

The employee deferral limit is $25,500 for 2027, up from $24,500 in 2026, per IRS release IR-2026-136 of November 12, 2026. The overall cap on employee plus employer contributions, before catch-up, is $75,000 for 2027. The age 50 catch-up is $8,500 and the age 60 to 63 catch-up is $11,750.

How do I compute the employer contribution as a sole proprietor?

Take net profit from Schedule C, subtract one-half of your self-employment tax, and multiply the result by 20 percent. The 20 percent rate is Publication 560's self-employed equivalent of a 25 percent plan rate, because your own contribution reduces the compensation it is measured against. Then add your deferral and check the total against the overall cap.

Is a solo 401(k) contribution a business expense on my profit and loss?

Not for a sole proprietor. The Schedule C instructions direct your own contributions to Schedule 1, line 16, not Schedule C. Record the deposit as an owner's draw against equity. For an S corporation the answer differs: deferrals run through payroll and the employer contribution is a corporate expense.

When do I have to make the election and the deposit?

For a sole proprietor, the deferral election must be in writing by the last day of the tax year, December 31, 2026 for the 2026 contribution. The deposit of both the deferral and the employer piece can be made by the return due date including extensions. A sole proprietor adopting a plan for the first time may adopt it and make first-year deferrals by the return due date without extensions under SECURE 2.0 section 317.

Does the mandatory Roth catch-up rule apply to me?

The rule is keyed to prior-year FICA wages from the employer sponsoring the plan, above a threshold of $155,000 of 2026 wages for 2027 catch-ups. A sole proprietor whose only income is self-employment income has no FICA wages, so the rule does not reach that owner. An S corporation owner's W-2 wages can trigger it, so confirm against the plan document and payroll.