Quick note: If you’re a business owner, how your finances are structured can impact your taxes.
Carry helps business owners and high earners manage Solo 401ks, IRAs, and advanced Roth strategies in one place. And for my readers, Carry is offering 50% off your first purchase of any membership with code CRUNCH50.
You can learn more at Carry.com (Eligibility and IRS rules apply. See disclosures for more)
Speaking of taxes, business owners have far more control over their tax bill than W-2 employees. But only if you know how the rules actually work.
The tax code is structured to reward self employment, business investment, and retirement saving, yet many business owners leave significant money on the table simply because they are unaware of all the strategies.
If you are eligible, a Solo 401(k) plan can be an effective way to lower your taxes or shield your investments from future taxation.
The amount you can contribute to a Solo 401(k) depends on your self-employment income, your age, whether you participate in another plan (like having a 401(k) at a W-2 job), the type of contribution, and your business entity.
For example, say you are 40 years old and have an S corporation with which you pay yourself $100,000 of wages. You can contribute:
- $23,500 to a pre-tax account as an employee
- $25,000 as an employer (up to 25% of your W-2 compensation)
In total, you can contribute $48,500 to your Solo 401(k). However, if your Solo 401(k) plan allows, you may also take advantage of a strategy called the “Mega Backdoor Roth,” also known as the after-tax account.
Going back to our example, the maximum 401(k) contribution (employee + employer + after-tax) allowed under the rules is $70,000 in 2025.
Since we already contributed $48,500, we still have $21,500 of room left (the maximum limit you can contribute to such a plan is $70,000, or $77,500 if age 50+, up to your compensation). You can contribute to an after-tax account and roll it over into a Roth 401(k) or Roth IRA.
This strategy is extremely useful for someone with a high-earning W-2 and a side hustle.
For example, if someone has $500K per year in W-2 income, already maxed out the employee side ($23,500) at their main job with no match, and has a $100K (net self-employment earnings) consulting gig on Schedule C, they can effectively contribute:
- $20,000 to an employer pre-tax account
- $26,500 to an after-tax account, for a total of $70,000 in retirement contributions.
And that’s why having the right Solo 401k provider matters, since not all Solo 401k platforms support strategies like after-tax contributions.
If you’re considering a Solo 401k or want to explore your options, Carry is worth a look!
Having the right entity
If you are self-employed, you have to pay self-employment taxes (7.65% as the employee and 7.65% as the employer, for a total of 15.3%) if you are a sole proprietor.
However, you could elect your business to be taxed as an S corporation, which could potentially help you save money on self-employment taxes. You would have to pay yourself a reasonable salary and can take the rest of your income as a distribution.
As a rule of thumb, an S corporation could help you save once you make $100,000 net from your self-employment activity. But it comes with extra steps, such as:
- Filing Form 1120-S
- Filing a W-2 and paying yourself a salary
- Paying FUTA/SUTA taxes
- State tax compliance and potential additional fees
So, it’s important to analyze the cost of the additional compliance fees to determine whether it’s worth it for your specific scenario.
Shifting income/expenses
Something that not a lot of people think about is how you can be strategic about the timing of your expenses and income.
Most self-employed business owners are on a cash basis. This means that they pay taxes on the cash that is constructively received, not when it is earned and services are provided.
This provides an opportunity to shift income depending on when you invoice and receive the money.
For example, say you are going to retire next year and your income will drop. In that case, it could make sense to bill a customer (for services provided) next year (the year of retirement) rather than in the current year.
Similarly, if you are experiencing incredible growth where you will make, say, $200K this year but are expecting $300K next year, it may make sense to postpone some of your expenses to the next year. For example, instead of upgrading your computer in 2025 and using bonus depreciation to write off 100% of the cost, you could buy it in 2026 instead and save money.
So it all depends on your current income and your projected income next year. If income will be higher next year, try to postpone expenses to next year. If income will be higher next year, try to realize as much income as you can this year.
Hiring your child
Hiring your child could be a legitimate tax and wealth-building strategy for business owners, but it must be done correctly. And it’s one of those strategies that is often abused or incorrectly set up.
Here are some tips:
- The work must be legitimate. Your business must have age appropriate, reasonable tasks your child can actually perform (e.g. admin work)
- Pay reasonable wages. Pay what you would pay an unrelated worker for the same job. Document how you determined the wage.
- Track everything. Hours worked, duties performed, and proof of work.
- Have your child complete and sign time logs.
- Run payroll and file forms. Issue a W-2, file required payroll reports (941, 940, state filings), and tax return
- Actually pay your child
- Follow child labor laws. Comply with federal, state, and local rules (e.g. work permit for minors).
The tax savings would depend on your circumstances (e.g. are you in a 37% tax bracket?)
Just have to make sure you do it legitimately and document (!).
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