Employer Deduction: Retirement Plans for Business Owners (2025 IRS Guide)

This guide covers “Employer Deduction” within retirement plans for business owners. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 560 (2025), Retirement Plans for Small Business, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

• Kinds of plans

• Qualification rules

• Setting up a qualified plan

• Minimum funding requirement

• Contributions

• Employer deduction

• Elective deferrals (401(k) plans)

• Qualified Roth contribution program

• Distributions

• Prohibited transactions

• Reporting requirements

Publications

• 575 Pension and Annuity Income

• 590-A Contributions to Individual Retirement Arrangements (IRAs)

• 590-B Distributions from Individual Retirement Arrangements (IRAs)

• 3066 Have you had your check-up this year? for Retirement Plans

• 3998 Choosing a Retirement Solution for Your Small Business

• 4222 401(k) Plans for Small Businesses

• 4530 Designated Roth Accounts under a 401(k), 403(b) or governmental 457(b) plan

• 4531 401(k) Plan Checklist

• 4674 Automatic Enrollment 401(k) Plans for Small Businesses

• 4806 Profit Sharing Plans for Small Businesses

Forms (and Instructions)

• W-2 Wage and Tax Statement

• Schedule K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.

• 1099-R Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

• 1040 U.S. Individual Income Tax Return

• 1040-SR U.S. Tax Return for Seniors

• Schedule C (Form 1040) Profit or Loss From Business

• Schedule F (Form 1040) Profit or Loss From Farming

• 5300 Application for Determination for Employee Benefit Plan

• 5310 Application for Determination for Terminating Plan

• 5329 Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts

• 5330 Return of Excise Taxes Related to Employee Benefit Plans

• 5500 Annual Return/Report of Employee Benefit Plan

• 5500-EZ Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan

• 5500-SF Short Form Annual Return/Report of Small Employee Benefit Plan

• 8717 User Fee for Employee Plan Determination Letter Request

• 8880 Credit for Qualified Retirement Savings Contributions

• 8881 Credit for Small Employer Pension Plan Startup Costs

• 8955-SSA Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits

These qualified retirement plans set up by self-employed individuals are sometimes called Keogh or H.R. 10 plans. A sole proprietor or a partnership can set up one of these plans. A common-law employee or a partner can't set up one of these plans. The plans described here can also be set up and maintained by employers that are corporations. All of the rules discussed here apply to corporations except where specifically limited to the self-employed.

The plan must be for the exclusive benefit of employees or their beneficiaries. These qualified plans can include coverage for a self-employed individual.

As an employer, you can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Employer Deduction

You can usually deduct, subject to limits, contributions you make to a qualified plan, including those made for your own retirement. The contributions (and earnings and gains on them) are generally tax free until distributed by the plan.

Deduction Limits

The deduction limit for your contributions to a qualified plan depends on the kind of plan you have.

Defined contribution plans.

The deduction for contributions to a defined contribution plan (profit-sharing plan or money purchase pension plan) can't be more than 25% of the compensation paid (or accrued) during the year to your eligible employees participating in the plan. If you are self-employed, you must reduce this limit in figuring the deduction for contributions you make for your own account. See Deduction Limit for Self-Employed Individuals, later.

When figuring the deduction limit, the following rules apply.

• Elective deferrals (discussed later) aren't subject to the limit.

• Compensation includes elective deferrals.

• The maximum compensation that can be taken into account for each employee in 2025 is $350,000 ($360,000 in 2026).

Defined benefit plans.

The deduction for contributions to a defined benefit plan is based on actuarial assumptions and computations. Consequently, an actuary must figure your deduction limit.

Caution:

In figuring the deduction for contributions, you can't take into account any contributions or benefits that are more than the limits discussed earlier under Limits on Contributions and Benefits.

Table 4-1. Carryover of Excess Contributions Illustrated—Profit-Sharing Plan (000's omitted)

Deduction Limit for Self-Employed Individuals

If you make contributions for yourself, you need to make a special computation to figure your maximum deduction for these contributions. Compensation is your net earnings from self-employment, defined in chapter 1. This definition takes into account both the following items.

• The deduction for the deductible part of your self-employment tax.

• The deduction for contributions on your behalf to the plan.

The deductions for your own contributions and your net earnings depend on each other. For this reason, you determine the deduction for your own contributions indirectly by reducing the contribution rate called for in your plan. To do this, use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 5. Then, figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5.

Where To Deduct Contributions

Deduct the contributions you make for your common-law employees on your tax return. For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), partnerships deduct them on Form 1065, and corporations deduct them on Form 1120 or 1120-S.

Sole proprietors and partners deduct contributions for themselves on line 16 of Schedule 1 (Form 1040). (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you get from the partnership.)

Carryover of Excess Contributions

If you contribute more to a plan than you can deduct for the year, you can carry over and deduct the difference in later years, combined with your contributions for those years. Your combined deduction in a later year is limited to 25% of the participating employees' compensation for that year. For purposes of this limit, a SEP is treated as a profit-sharing (defined contribution) plan. However, this percentage limit must be reduced to figure your maximum deduction for contributions you make for yourself. See Deduction Limit for Self-Employed Individuals, earlier. The amount you carry over and deduct may be subject to the excise tax discussed next.

Table 4-1. Carryover of Excess Contributions Illustrated Profit-Sharing Plan illustrates the carryover of excess contributions to a profit-sharing plan.

Excise Tax for Nondeductible (Excess) Contributions

If you contribute more than your deduction limit to a retirement plan, you have made nondeductible contributions and you may be liable for an excise tax. In general, a 10% excise tax applies to nondeductible contributions made to qualified pension and profit-sharing plans and to SEPs.

Special rule for self-employed individuals.

The 10% excise tax doesn't apply to any contribution made to meet the minimum funding requirements in a money purchase pension plan or a defined benefit plan. Even if that contribution is more than your earned income from the trade or business for which the plan is set up, the difference isn't subject to this excise tax. See Minimum Funding Requirement, earlier.

Reporting the tax.

You must report the tax on your nondeductible contributions on Form 5330. Form 5330 includes a computation of the tax. See the separate instructions for completing the form.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 560 (2025), Retirement Plans for Small Business: Qualified Plans — Employer Deduction — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.