Pay your team. Not the IRS.
How business owners use a 401(k) to cut both business and personal taxes. Updated for 2026 limits and rules.
Inside: the three SECURE 2.0 credits that can cover what the plan costs. Why matching contributions skip payroll tax entirely. And a real illustration where cross-testing moved $71,820 into the owner’s retirement instead of $13,691, same company, same census, both passing every IRS test.
Nineteen pages. No pitch, just the math. Read it right here, or take the PDF with you.
Pay your team.
Not the IRS.
How business owners use a 401(k) to reduce business and personal taxes. A plain-language walk through the deductions, credits, and payroll savings built into a modern plan, updated for 2026 limits and rules.
The often overlooked tax benefits of a 401(k)
Whether you are just starting out or have been in business for decades, a 401(k) may be an excellent addition to your company. It comes with benefits most owners never fully claim, from tax deductions and credits to stronger employee retention.
In this guide, we will explore how a 401(k) reduces taxes in three places at once.
Your employees benefit along the way. A well-designed plan is consistently ranked among the benefits workers value most, which is why the same plan that trims your tax bill also helps you hire and keep good people.
Three ways to save on the money you put in
One of the best advantages of a 401(k) is that it lets both owners and employees save for retirement easily. Retirement accounts carry tax advantages a regular investment account simply does not have. Here are the three contribution options that matter most.
Pre-tax contributions lower your taxable income
In a traditional 401(k), contributions happen before taxes. Both owners and employees put money in without paying federal or state income tax on it, which lowers taxable income right now. The money then grows tax deferred, and withdrawals are taxed as ordinary income in retirement.
In plain terms, every dollar you defer is a dollar the IRS does not count as income this year.
Employers can contribute on top of these limits through matching and profit sharing, up to a combined $72,000 per person in 2026. Limits adjust each year, so check the latest IRS guidance.
Roth contributions make retirement withdrawals tax free
With a Roth 401(k), contributions are made after taxes. Instead of a tax break today, you pay taxes now in exchange for tax-free growth and tax-free qualified withdrawals in retirement. That trade is appealing if you expect to be in a higher tax bracket later and want to lock in today’s rate.
Roth contributions do not lower your taxable income the way traditional ones do, but they diversify how your savings are taxed. The annual limits and catch-up provisions are the same as traditional contributions.
SECURE 2.0 also lets employees choose to have employer contributions treated as Roth. The IRS has since spelled out exactly how that works. See our full discussion on page 10.
Profit sharing can be worth more than a bonus
Beyond matching, your business can make profit-sharing contributions to employee accounts. They are tax deductible for the previous tax year, so you can decide after year end how much you can afford, or elect to contribute nothing that year.
Employees often prefer profit sharing to a bonus because it does not increase their taxable income. It also does not count toward their personal deferral limit, which makes it especially valuable for anyone who has already maxed their own contributions.
Owners often benefit most from the new comparability method. It typically directs more to those who are older and earn more, which lets you maximize contributions to your own account while still funding your team’s. PlanForge designs the allocation formula around your goals.
Three tax-saving channels for the business itself
The personal savings are only half the story. The business entity saves too, and for many owners the tax treatment is the single biggest reason to offer a retirement benefit at all.
Plan costs are deductible business expenses
A 401(k) is an employee benefit, so the costs that come with it are deductible. That includes the contributions you make to employee accounts and the administrative costs of establishing and maintaining the plan.
Typical plan fees that qualify:
Matching contributions skip payroll taxes
Every dollar of wages you pay carries payroll tax on top. Employer matching contributions do not. They avoid Social Security, Medicare, and unemployment taxes entirely, while still being a deductible expense.
That changes how you think about compensation. When you provide a match, your team receives real compensation through the plan, and you can weigh that against the size of the next raise or bonus. Dollars delivered through the match cost you less than the same dollars delivered as wages.
| FICA withholding | Employer | Employee |
|---|---|---|
| Social Security | 6.2% | 6.2% |
| Medicare | 1.45% | 1.45% |
| Additional Medicare, wages over $200,000 | 0% | 0.9% |
Roth employer contributions, explained
SECURE 2.0 lets employees choose to have employer matching and profit-sharing contributions treated as Roth. When the law first passed, nobody knew how the tax reporting would work. The IRS has since settled it in Notice 2024-2, so here is how it actually works.
The trade is the same as any Roth decision. Pay tax on the match once, now, and it grows and comes out tax free. For workers who expect higher income later, that can be the better end of the deal.
Tax credits can pay you back for starting a plan
Deductions reduce your taxable income. Credits are better. They reduce your tax bill dollar for dollar. SECURE 2.0 created and expanded three credits designed to make retirement plans affordable for small businesses, and together they are the engine behind our net-zero plan design.
One rule to know up front. For startup costs, you can claim the credit or deduct the expenses, but not both. For most small businesses the credit is worth far more. The first of the three credits rewards automatic enrollment.
Here is the easy part. SECURE 2.0 requires most 401(k)s established after 2022 to include automatic enrollment anyway, with exceptions for the newest and smallest businesses. So a well-designed new plan typically earns this credit without doing anything extra.
Startup costs, up to 100 percent covered
The second credit covers the administrative cost of establishing a new plan. SECURE 2.0 expanded it to cover all of it for most small businesses, for each of the plan’s first three years.
Get credit for the contributions you make
The third credit reimburses part of what you contribute to employee accounts, up to $1,000 per eligible employee per year, for the plan’s first five years. For businesses with 50 or fewer employees, the schedule looks like this.
100%
100%
75%
50%
25%
Businesses with 51 to 100 employees use a sliding scale. The percentage drops 2 points for every employee over 50, and the same five-year schedule applies. A business with 70 employees, for example, is 20 over the line, so its credit is reduced 40 percent and it claims 60 percent of each year’s figure.
Eligible employees are those paid no more than $100,000 in wages, indexed for inflation. Contributions to owners and other high earners do not count toward the credit.
What net-zero looks like in real numbers
This is an actual PlanForge illustration for a Texas business. Two owners, 46 eligible employees, about $2.2 million in payroll. Every employer contribution shown is voluntary and discretionary. Nothing here is required.
Just you? A solo 401(k) works harder.
If your business employs just one owner, plus a spouse if applicable, a solo 401(k) is a great option. You wear both hats, employee and employer, so you can contribute from both sides of the table.
The result is one of the largest retirement contribution opportunities available to the self-employed, with almost none of the administrative weight of a full company plan.
Large contributions, little overhead
The net-zero 401(k)
Every credit and deduction in this guide is something PlanForge builds into your plan design from day one. On a new plan, SECURE 2.0 credits can offset the costs entirely. On a rollover, we lower your fees. Either way, you keep the tax savings.
And the plan is only the foundation. Every participant gets the full PlanForge financial toolkit, from budgeting and debt to retirement projections, with a real advisor to talk to. Guided by Nick Moore, CFP®. A real advisor. Not a call center.
