Retirement Plans for an Independent Consultant: The SEP, the Solo 401(k), the Defined Benefit Plan, and the Threshold That Decides the Size

Consultants save for retirement through their business, and the plan is the largest deduction on most consultants' returns (among everything a consultant can write off) — sized, for those near the threshold, by a computation the plumber never runs. The menu (the bookkeeping practice retirement guide and the coaching retirement guide lay out the mechanics for adjacent trades; the consultant's version has the same tools and often higher income). The SEP IRA: the employer contributes up to 25% of compensation (20% of net profit after the self-employment tax deduction for a Schedule C consultant; 25% of W-2 salary for an S corporation owner) up to the annual additions limit; no annual filing; established and funded as late as the extended return due date for the prior year — the plan a consultant can still adopt in September for last year; the constraint is the equal-percentage rule for eligible employees (a consultancy with a W-2 bench funds every eligible employee at the same percentage — expensive, and the reason firms with staff move to a 401(k)). The Solo 401(k): for a consultant with no employees other than a spouse — employee deferrals up to US$24,500 for 2026 (plus an US$8,000 catch-up for those fifty and over, and US$11,250 for those in the 60-to-63 band) plus employer contributions (25% of salary or 20% of net profit), within the overall annual additions limit; the deferral stacks on the employer contribution, so the Solo 401(k) allows more than the SEP at the same income; a Roth option for the deferrals; Form 5500-EZ above the asset threshold; established by December 31 for the year's deferrals (the employer portion by the return deadline) — the plan for the solo consultant netting into the low-to-mid six figures, and the deadline that a September SEP can't rescue for the deferral portion. The small-employer 401(k): for a firm with a bench — a safe-harbor design (a 3% nonelective or a 4% match for eligible employees exempts the plan from testing) lets the owners contribute at the top of the limits; a plan document, a third-party administrator, the Form 5500; the retirement plan startup and employer contribution credits (the daycare center retirement guide) offset much of the early cost for firms under the employee-count thresholds. The defined benefit and cash balance plan: for a consultant over fifty with a stable, high income who wants to contribute far beyond the defined contribution limits — an actuarially determined annual contribution (age, income, and the target benefit set it; for an older high-earner it can reach US$100,000 to US$300,000 a year), deductible in full, paired with a Solo 401(k) or small-employer 401(k) under the combined-plan limits; the trade-offs: a required annual funding commitment (designed with some flexibility, not optional in a lean year), actuarial and administration costs, the Form 5500, and the obligation to cover eligible employees (a bench makes the plan expensive; a solo practice makes it the tool for sheltering six figures); the consultant with an eight-year retainer base and a decade to retirement is the candidate. The threshold arithmetic — the consultant's reason (the consulting entity guide covers the classification): consulting is a specified service trade, so the QBI deduction is full below the taxable-income threshold, partial through the phase-out range (widened to US$75,000/US$150,000 and made permanent by the 2025 law), and zero above it; a retirement contribution reduces taxable income dollar for dollar (the employer contribution as a business deduction; the deferral as a reduction of wages or an above-the-line deduction), so a consultant whose taxable income would land in the range can contribute enough to land below the threshold — saving the contribution's own tax at the marginal rate plus the QBI deduction it rescues (20% of qualified business income at the marginal rate); the combined saving on the contribution for a consultant in the range can exceed the marginal rate plus the QBI effect, which is why the consultant in the range funds the plan before any other year-end move, and why the plan's room (SEP, Solo 401(k), or defined benefit) is chosen to reach the line. The computation, in order: projected taxable income (household, after the standard or itemized deduction and the health insurance deduction); distance to the threshold; the contribution needed; the room under each plan at the consultant's compensation; the combined saving; the cash available; the plan and its deadline. The S corporation interaction (the entity guide): an S corporation consultant's contributions are based on W-2 salary — 25% of salary for the employer contribution, deferrals from salary — so a low salary limits the room; the consultant's reasonable salary (most of the profit, for a consultant — the entity guide's point) is usually high enough that the room is ample, and where retirement room matters the salary decision tilts higher, alongside the wage limitation above the threshold (the coaching entity guide's mechanics apply to consultants too — a non-SSTB line above the threshold needs W-2 wages for any QBI deduction). The above-the-range consultant: no QBI deduction under any plan — the retirement contribution's value is its own tax saving at the top marginal rate (still the largest deduction available) and the tax-deferred growth; the defined benefit plan is the tool for a consultant well above the range who wants to shelter six figures, and the threshold strategy is irrelevant. The bench interaction: a consultancy with W-2 consultants has coverage obligations — the SEP's equal-percentage rule, the 401(k)'s eligibility and safe-harbor rules, the defined benefit plan's coverage — and the plan is priced with the bench's cost and the credits; the bench's own retirement benefit is a retention tool in a profession where consultants move for it. The Roth question: a consultant in a high bracket now who expects a lower one in retirement takes the traditional deduction; the threshold strategy tilts toward traditional in the years the QBI rescue is in play (a Roth deferral doesn't reduce taxable income). The deadlines, which decide the plan: Solo 401(k) and small-employer 401(k) — established by December 31 for the year's deferrals; SEP — established and funded by the extended return deadline for the prior year; defined benefit — adopted by the return deadline (under recent law, a plan can be adopted for the prior year up to the return's due date) and funded on the actuarial schedule; and the November planning meeting is where the threshold computation runs with time to establish the right plan before year-end — the consultant who discovers the threshold in March has the SEP's smaller room and nothing else.

Key takeaways

• The menu: SEP (25% of compensation, establishable by the extended return date, equal-percentage for staff), Solo 401(k) (deferral plus employer contribution — the most room for a solo consultant, established by December 31), small-employer safe-harbor 401(k) for a bench (with the startup and contribution credits), defined benefit or cash balance (six-figure contributions for older, stable, high-earning consultants — a funding commitment).
• The threshold arithmetic is the consultant's reason: consulting is a specified service trade — the contribution that pulls taxable income below the threshold saves its own tax plus the QBI deduction the phase-out was taking.
• Run it in November: taxable income, distance to the threshold, contribution needed, room under each plan, combined saving, cash — then establish the plan before December 31.
• S corporation salary sets the room (25% of salary; deferrals from salary) — the consultant's high reasonable salary usually provides ample room, and the wage limitation above the threshold pulls the same way.
• Above the range, no QBI deduction under any plan — the contribution's value is its own top-rate deduction, and the defined benefit plan is the six-figure tool.
• December 31 is the deadline that matters: the consultant without a 401(k) by then has the SEP's smaller room in March.

The consultant's November threshold computation

Projected taxable income (household, after deductions). QBI threshold and range for the filing status. Distance to the threshold. Contribution needed. Room: SEP vs Solo 401(k) (deferral + catch-up + employer at the consultant's compensation) vs defined benefit (actuarial). Combined saving: marginal rate × contribution + 20% of QBI restored × marginal rate. Cash available. Plan choice; establishment deadline; the bench's coverage cost if any. One page before December; the consultant who crosses the threshold this year needs the computation more than any client does.

Worked example

A management consultant (S corporation, married filing jointly, age 48) nets US$340,000 — a US$190,000 salary and US$150,000 of distributions — with taxable income projected in the specified-service phase-out range, where the QBI deduction would be roughly half its full value. The November computation: the contribution needed to reach the threshold is about US$55,000; a Solo 401(k) allows the deferral (US$24,500 for 2026) plus 25% of her US$190,000 salary (US$47,500) — about US$72,000 of room; she contributes US$56,000 (the deferral by December 31, the employer portion by the return deadline): taxable income lands below the threshold, the full QBI deduction is restored (about US$30,000 of additional deduction), and the combined tax saving on the US$56,000 exceeds US$32,000 — the return on the contribution before it's invested. Her partner in a two-partner firm with a four-consultant bench, age 56, taxable income far above the range (no QBI deduction under any plan), stable income for a decade: a cash balance plan paired with the firm's safe-harbor 401(k) — the actuary sets a US$210,000 annual contribution for him, deductible in full, with the bench covered under the 401(k)'s safe-harbor contribution and the cash balance plan's coverage priced into the decision (the bench's share is a retention benefit the firm was willing to fund); the plans' administration costs several thousand a year against six figures of deduction. A third consultant, solo, who discovered the threshold in March: no 401(k) established by December 31 — the SEP (establishable by the extended return date) is the only option, its 25%-of-salary room reaches the threshold this year with nothing to spare, and the Solo 401(k) is established in April for the years after. Three consultants, three plans, and the second one's actuary and the third one's missed December are the decisions that set the size.

Official sources

The IRS states that "a SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees," and that it "allows for a contribution of up to 25 percent of each employee's pay," subject to the annual limit, with the same percentage 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

The IRS states that a one-participant 401(k) "is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse," allowing employee deferrals plus employer contributions, and that the plan "is generally required to file an annual report on Form 5500-EZ if it has $250,000 or more in assets at the end of the year." — Internal Revenue Service, One-participant 401(k) plans, https://www.irs.gov/retirement-plans/one-participant-401k-plans

Practitioner note

A consultant's retirement contribution is the largest deduction on the return and, for those near the specified-service threshold, the one that rescues the QBI deduction — a combined saving no investment produces. Our November computation runs the room under each plan against the distance to the line: the Solo 401(k) for the solo consultant, the safe-harbor 401(k) with credits for the firm with a bench, the cash balance plan for the older high-earner with a stable practice — and the deadline we never let slip is December 31, because the consultant who finds the threshold in March is choosing the SEP's smaller room.

See also: For related guidance, see what an independent consultant can write off; and browse every small business tax guide, by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles retirement plan design and funding for consultants and consulting firms — the November threshold computation against the specified-service phase-out, SEP and Solo 401(k) room at the consultant's compensation, safe-harbor 401(k) and defined benefit design for firms with a bench, S corporation salary coordination, and establishment deadlines. See pricing or book a call.