The biggest legitimate tax-saving move available to most Houston small business owners isn’t a creative deduction or a clever entity structure. It’s setting up the right retirement plan and actually funding it. The right plan can shelter $20,000 to $70,000+ from income tax every year, deferred to retirement when you’ll likely be in a lower bracket. Here’s how to choose between the three plans most small businesses use.
Solo 401(k)
Best for: owner-only businesses (or owner + spouse only), with high net income, who want to maximize contributions.
How it works: you make contributions in two roles — as the employee (salary deferral) and as the employer (profit sharing).
- Employee contribution: up to $24,500 in 2026 ($32,500 if age 50 or older)
- Employer contribution: up to 25% of compensation, with a combined cap of $72,000 ($80,500 if 50 or older)
Solo 401(k)s allow Roth contributions, loans, and after-tax voluntary contributions in some setups. The plan must be established by December 31 of the year you want contributions for, though employer contributions can be funded up to the tax return deadline.
SEP IRA
Best for: self-employed individuals or small businesses with employees who want a simpler setup, no annual filings (Form 5500), and flexibility on contribution amounts year over year.
How it works: employer-only plan. You contribute up to 25% of each eligible employee’s compensation (with a per-employee cap of $72,000 in 2026). Whatever percentage you contribute for yourself, you must contribute the same percentage for every eligible employee.
For solo owner-operators, the math comes out similar to a Solo 401(k) employer contribution — but no employee salary deferral, so the maximum is lower if you have moderate income. A SEP can be established and funded as late as the extended return deadline (October 15) for the prior year.
SIMPLE IRA
Best for: small businesses with up to 100 employees that want to offer retirement benefits with minimal administration and don’t need the higher contribution limits of a 401(k).
How it works: employees can defer up to $16,000 in 2024 ($19,500 if 50+). Employer must either match contributions up to 3% of compensation or contribute 2% of compensation for all eligible employees regardless of whether they participate. Lower limits, simpler administration, no annual Form 5500 filing.
Which one for your situation?
Quick framework based on what we see in Houston:
- Solo W-2 sole proprietor making $100K+: Solo 401(k). Higher limits because of salary deferral.
- Solo S-corp owner with reasonable comp around $80K: Solo 401(k). Same reason.
- Side business in addition to W-2 day job (already maxing 401(k) at work): SEP IRA. Simpler, no plan paperwork required, employer-side contributions only.
- 5-15 employee small business: SIMPLE IRA if owner takes modest comp; SEP if owner takes high comp; 401(k) plan (regular, not Solo) if you want both employee deferrals and employer match.
- Large business with high-comp owners: Traditional 401(k) plus profit-sharing — potentially with cash balance pension layered on top for owners 45+.
The cash balance pension play
For high-income business owners over age 45, a cash balance defined-benefit pension stacked on top of a 401(k) can shelter $150,000-$300,000+ per year. This is the most aggressive legal retirement deferral strategy available. It requires actuarial work and IRS-approved plan documents, but for the right client (think: solo professional service business with $500K+ net income, owner age 50+), the tax savings are transformational.
Don’t make these mistakes
- Setting up the plan in February for the prior year — Solo 401(k) requires the plan be established by December 31
- Mixing personal and business contributions through the wrong account
- Forgetting that contributions reduce QBI for Section 199A purposes — sometimes the math favors a different mix
- Not coordinating spousal contributions when both work in the business
- Failing to roll over old 401(k)s and IRAs for portfolio simplicity
The first step is just opening the account
The biggest barrier to small business retirement is usually not the math — it’s the friction of opening the plan. Fidelity, Schwab, Vanguard, and E*TRADE all offer Solo 401(k)s and SEPs at no cost. Setup takes about 30 minutes online. The hard part is committing to fund it monthly or quarterly rather than scrambling at year-end.
If you want help running the numbers on which plan fits your specific income, employee mix, and tax bracket, call the office at (832) 594-0339 or use the contact page. We work this out as part of annual tax planning with most of our small business clients.