What is the difference between a 1099 contractor and W2 employee for taxes?

A W2 employee has income, Social Security, and Medicare taxes withheld by their employer, while a 1099 contractor receives gross income and is responsible for paying their own self-employment tax of 15.3% plus federal and state income tax. Contractors can deduct business expenses on Schedule C, while W2 employees generally cannot deduct unreimbursed work expenses.

How much can a 1099 contractor save with an S-Corp election?

By electing S-Corp status, a profitable contractor pays themselves a reasonable W2 salary and takes the remainder as distributions, which are exempt from the 15.3% self-employment tax. For a contractor earning $120,000, this can save roughly $7,000 to $10,000 per year after factoring in payroll and compliance costs.

What is a Solo 401(k) and who qualifies?

A Solo 401(k) is a retirement plan for self-employed individuals and small business owners with no employees other than a spouse. For 2026, you can defer up to $23,500 as an employee plus contribute up to 25% of net self-employment earnings as the employer, with a combined cap of $70,000.

What services does Mitchell & Scott Advisory Group offer?

Mitchell & Scott Advisory Group offers tax preparation, customized tax planning, and bookkeeping services for small businesses, 1099 independent contractors, and W2 employees.

How do I book a tax consultation with Mitchell & Scott?

You can book a free 15-minute discovery call directly on the website using the online scheduling tool, or submit a contact form and an advisor will reach out within one business day.

What Is a Solo 401(k) and How Much Can You Save?

February 22, 2026·By Mitchell & Scott Advisory Group

The Solo 401(k) is a retirement plan designed for self-employed individuals and small business owners with no employees other than a spouse. For 2026, it allows a combined contribution of up to $70,000 ($77,500 with the catch-up contribution for those 50 and over) — making it the highest-limit retirement vehicle most contractors can access.

How the contribution stack works

Solo 401(k) contributions come from two sides of the same person. As the "employee," you can defer up to $23,500 of compensation in 2026. As the "employer," you can additionally contribute up to 25% of net self-employment earnings (or W2 wages, if you have an S-Corp). The combined cap is $70,000 — and that combination is what separates it from a SEP IRA, where you have only the employer side.

Solo 401(k) vs. SEP IRA

Both plans share the same $70,000 ceiling, but the Solo 401(k) reaches it at a lower income level because of the employee deferral. A contractor with $80,000 of net SE income can contribute roughly $39,000 to a Solo 401(k) but only about $15,000 to a SEP IRA. The Solo 401(k) also allows Roth contributions and loans against your balance, which the SEP IRA does not.

Setup and deadlines

Solo 401(k) plans must generally be established by December 31 of the tax year, though the SECURE Act now allows the employer portion to be funded as late as the business tax filing deadline. Several major brokerages (Fidelity, Schwab, Vanguard, E-Trade) offer Solo 401(k)s with no setup fees — though only a few offer the Roth option, so shop carefully.

Who qualifies

You must have self-employment income and no W2 employees other than a spouse. Independent contractors, freelancers, single-member LLCs, S-Corp owners, and side-hustlers all qualify. Even if self-employment is your secondary income, you can still open a Solo 401(k) — though your contribution is limited by that side income alone.

Frequently asked questions

Can I have a Solo 401(k) and a regular 401(k) at my W2 job?

Yes, but the $23,500 employee deferral limit is shared between both plans. You cannot defer $23,500 into each. The employer-side contribution to the Solo 401(k), however, is separate and uncapped by your W2 plan.

What happens to my Solo 401(k) if I hire an employee?

Once you hire a non-spouse employee who works more than 1,000 hours per year, the Solo 401(k) generally must be converted to a traditional 401(k), which adds compliance complexity. Many small business owners hire contractors instead of W2 employees specifically to preserve their Solo 401(k).

Roth Solo 401(k) or Traditional — which is better?

Traditional contributions reduce current-year taxable income; Roth contributions grow tax-free. If you expect higher tax rates in retirement than today (younger savers, lower current income), Roth often wins. If you are in your peak earning years today, traditional usually wins.

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