Retirement Plans for a Bookkeeping Practice: The Solo 401(k), the SEP, and the Contribution That Saves the QBI Deduction

Retirement contributions do two things for a bookkeeping practice owner near the QBI threshold, and the second one is the reason the plan decision is a tax decision rather than a savings decision. The plan menu for a self-employed practitioner. SEP IRA: the simplest — the practice contributes up to 25% of the owner's compensation (for a Schedule C owner, 20% of net profit after the self-employment tax deduction — the circular computation the IRS worksheet handles; for an S corporation owner, 25% of W-2 salary) up to the annual dollar limit (US$72,000 for 2026, on compensation capped at US$360,000); no annual filing, opened and funded as late as the extended return due date, and — the constraint — the same percentage must be contributed for every eligible employee, which makes the SEP expensive once the practice has staff. Solo 401(k): for a practice with no employees other than the owner and spouse — the owner contributes as an employee (elective deferrals up to US$24,500 for 2026, plus an US$8,000 catch-up for those 50 and over and an US$11,250 catch-up for those in the 60-to-63 band) and as the employer (up to 25% of compensation, 20% of net profit for Schedule C), with the combined total capped at the overall annual additions limit (US$72,000 for 2026) — so a Solo 401(k) allows a larger contribution than a SEP at the same income (the employee deferral stacks on the employer contribution), plus a Roth option for the deferrals and, in many plans, loan provisions; the plan must be established by year-end for the employee deferrals (the employer contribution can be made by the return deadline), and once plan assets reach US$250,000 an annual Form 5500-EZ is required. SIMPLE IRA: for a practice with staff that wants a low-administration plan — lower contribution limits than a 401(k), mandatory employer matching or non-elective contributions for eligible employees, and no discrimination testing; the plan for a small practice that has outgrown the SEP's equal-percentage rule but isn't ready for a full 401(k). Full 401(k) with employees: for a practice with several staff — employee deferrals, employer match or profit sharing, discrimination testing (or a safe harbor design that avoids it), and annual administration and filing costs; the plan for a growing firm where the owner's contribution room matters and the staff benefit is part of retention. Defined benefit and cash balance plans: for a high-profit practitioner over 50 with a stable income who wants to contribute far beyond the defined contribution limits — an actuarially determined annual contribution that can reach six figures, with the trade-offs of required annual funding, actuarial and administration costs, and the obligation to cover eligible employees; the plan for the practitioner netting several hundred thousand dollars with a short horizon to retirement and a desire to shelter as much as possible. The threshold arithmetic (the entity guide's companion): bookkeeping is a specified service trade or business, so the QBI deduction phases out over the range above the taxable-income threshold (US$201,750 single / US$403,500 joint for 2026, a range the 2025 legislation widened to US$75,000 / US$150,000 and made permanent, effective 2026) and disappears above it; a retirement contribution reduces taxable income dollar for dollar (the employer contribution is a business deduction for the practice; the employee deferral reduces the owner's wages or, for Schedule C, is an above-the-line deduction), so a practitioner whose taxable income would land in the phase-out range can contribute enough to land below the threshold — and the contribution then saves its own tax (the ordinary deduction) plus the QBI deduction it rescues (20% of qualified business income that would otherwise have been partially or wholly lost); the combined tax saving on the contribution can approach or exceed the practitioner's marginal rate plus the QBI effect, which is a return no investment produces, and it is the reason a practitioner near the threshold funds the plan before considering anything else. The computation, in order: projected taxable income before the contribution; distance to the threshold (or into the range); the contribution needed to reach the threshold; the contribution allowed under the chosen plan (SEP or Solo 401(k) limits at the practitioner's compensation); the tax saved on the contribution (marginal rate) plus the QBI deduction restored (20% of QBI times the marginal rate); the cash available to contribute; and the plan choice that fits (Solo 401(k) for the larger room; SEP for simplicity where the room suffices). The S corporation interaction: an S corporation practitioner's plan contributions are based on W-2 salary (25% employer contribution on salary; employee deferrals from salary), so a low reasonable salary limits the contribution room — one more variable in the salary decision the entity guide describes, pulling toward a higher salary where retirement room matters, against the payroll-tax saving that pulls toward a lower one. The staff interaction: the SEP's equal-percentage rule and the 401(k)'s coverage rules mean a practice with employees funds their retirement alongside the owner's — a cost, and a retention tool, priced into the plan choice (the SIMPLE IRA as the middle path for small staffs). The deadlines: SEP contributions by the extended return deadline for the year (the plan established by then too); Solo 401(k) established by December 31 for employee deferrals, with employer contributions by the return deadline; defined benefit plans established and funded on their own actuarial schedule; and the year-end planning meeting in November is where the threshold computation is run with enough time to act. The practitioner's own credibility note: a bookkeeper who advises clients on retirement plan deadlines and contribution limits and has no plan of their own is a practitioner whose clients eventually ask.

Key takeaways

• The menu: SEP IRA (simple, 25% of compensation, equal percentage for staff), Solo 401(k) (owner-only, employee deferrals plus employer contributions for larger room, Roth option, 5500-EZ above the threshold), SIMPLE IRA (small staffs, low administration), full 401(k) (growing firms), defined benefit/cash balance (high-profit practitioners over 50 seeking six-figure contributions).
• The threshold arithmetic is the bookkeeper's reason: as a specified service trade, the practice's QBI deduction phases out above the taxable-income threshold — a contribution that pulls income below it saves its own tax plus the QBI deduction it rescues.
• Run it in November: projected taxable income, distance to the threshold, contribution needed, plan room at your compensation, combined saving, cash available — then choose the plan with the room to reach the line.
• S corporation salary sets the room: contributions are based on W-2 wages, pulling toward a higher salary where retirement room matters — a variable in the entity worksheet.
• Staff change the plan: SEP equal-percentage and 401(k) coverage rules fund employees alongside the owner; the SIMPLE IRA is the small-staff middle path.
• Deadlines differ: SEP by the extended return date; Solo 401(k) established by December 31 for deferrals; defined benefit on its own schedule.

The November threshold computation

Projected taxable income (all household income, after the standard or itemized deduction and the health insurance deduction). QBI threshold and range for the filing status. Distance to the threshold. Contribution needed to reach it. Room available: SEP (20% of net profit, or 25% of salary) vs Solo 401(k) (deferral plus catch-up plus employer contribution, within the annual additions limit). Tax saved: marginal rate on the contribution plus 20% of QBI restored at the marginal rate. Cash available. Plan choice and the establishment deadline. One page, run before December, and the year the practitioner crosses the threshold is the year the computation pays for the plan's administration many times over.

Worked example

A solo bookkeeper on Schedule C nets US$210,000, single, with projected taxable income landing in the middle of the specified-service phase-out range — her QBI deduction would be roughly half its full value. The November computation: the contribution needed to bring taxable income to the threshold is about US$35,000; a SEP allows about US$39,000 at her net profit (20% after the self-employment tax deduction); a Solo 401(k) allows more (the employee deferral plus catch-up — she's 52 — plus the employer contribution, well above US$60,000 combined). She establishes a Solo 401(k) by December 31 and contributes US$36,000 (the deferral and catch-up by year-end, the employer portion by the return deadline): taxable income lands below the threshold, the full QBI deduction is restored (about US$28,000 of additional deduction that the phase-out was taking), and the combined tax saving on the US$36,000 contribution — the contribution's own deduction plus the restored QBI deduction, both at her marginal rate — exceeds US$20,000, a return on the contribution no investment matches. Her colleague, netting the same amount as an S corporation with a US$95,000 salary, has less room (25% of salary for the employer contribution plus the deferral) and reaches the threshold only by combining the maximum plan contribution with a higher health insurance deduction — the salary decision from the entity worksheet, revisited. Both fund their plans before December; the practitioner down the hall, who "does retirement in April when the return is done," discovered the Solo 401(k)'s December 31 establishment deadline the following spring, contributed to a SEP instead with less room, and landed in the phase-out range with a partial QBI deduction — a five-figure difference decided by which month the computation was run.

Official sources

The IRS explains that a one-participant 401(k) plan covers a business owner with no employees (other than a spouse), permitting elective deferrals up to the annual limit as an employee plus employer contributions up to 25% of compensation, subject to the overall annual additions limit. — Internal Revenue Service, One-participant 401(k) plans, https://www.irs.gov/retirement-plans/one-participant-401k-plans

The IRS explains that a Simplified Employee Pension plan allows an employer to contribute to traditional IRAs set up for employees, including a self-employed owner, up to 25% of compensation subject to the annual limit, with contributions deductible by the business and the same percentage required for all eligible employees. — Internal Revenue Service, Simplified Employee Pension Plan (SEP), https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep

Practitioner note

Retirement contributions are the bookkeeper's best tax move because the practice is a specified service trade: the contribution that pulls taxable income below the QBI threshold saves its own deduction and rescues the 20% deduction the phase-out was taking, a combined return nothing else produces. We run the threshold computation every November — distance to the line, room under each plan, the establishment deadline — because the Solo 401(k) has to exist by December 31, and the practitioner who does retirement in April has already chosen the plan with less room.

See also: For related guidance, see a bookkeeping practice's entity structure and the SSTB phase-out; and browse every small business tax guide, by situation.

Next step

Fairlight handles retirement plan selection and funding for practice owners — the November threshold computation against the specified-service QBI phase-out, Solo 401(k) and SEP room at your compensation, S corporation salary coordination, and plan establishment and contribution deadlines. See pricing or book a call.