Service boundary: This article is general education, not a plan recommendation. Monaco CPA may address federal and NJ tax-return treatment and contribution-limit reporting only for an account the client has already established under an accepted written scope. Monaco CPA does not recommend, select, open, set up, administer, or manage plans; provide investment allocation, Backdoor Roth, or individualized IRA strategy; or provide defined-benefit or cash-balance services.
In This Article
- How Does a SEP-IRA Work for NJ Small Business Owners?
- How Does a Solo 401(k) Compare With a SEP-IRA?
- How Does a SIMPLE IRA Work for Businesses With Employees?
- What Are the NJ State Tax Benefits of Retirement Plan Contributions?
- Key Takeaway
- Ready to File With Confidence?
Retirement-plan contribution and reporting rules differ by plan type, and New Jersey treatment likewise depends on the plan involved. A SEP-IRA allows contributions up to 25% of compensation - effectively about 20% of net SE profit (max $70,000 for 2025, $72,000 for 2026 per IRS Notice 2025-67). A Solo 401(k) offers higher combined limits. Important NJ nuance per N.J.S.A. 54A:6-21: 401(k) employee deferrals ARE excludable from NJ gross income; NJ guidance does not clearly address employer (match/profit-sharing) contributions to a Solo 401(k) - confirm that share for your facts. Defined benefit employer contributions are taxable for NJ (the exclusion covers only 401(k) plans). But SEP-IRA and SIMPLE IRA contributions are NOT deductible for NJ purposes - they instead create NJ basis recoverable tax-free in retirement under the 3-Year Rule or General Rule. (Updated May 2026.)
Federal and New Jersey return treatment varies by plan type under the applicable contribution and reporting rules.
How Does a SEP-IRA Work for NJ Small Business Owners?
Contributions up to 25% of compensation - effectively about 20% of net self-employment profit - max $70,000 for 2025 ($72,000 for 2026 per IRS Notice 2025-67). Easy to set up, no annual filing. Deadline extends to tax return due date. Main drawback: must contribute same percentage for employees. NJ treatment: SEP-IRA contributions are NOT deductible against NJ gross income; they create NJ basis recoverable tax-free in retirement.
How Does a Solo 401(k) Compare With a SEP-IRA?
Both employee deferrals ($23,500 for 2025, $24,500 for 2026 per IRS Notice 2025-67) and employer contributions (up to 25%). Combined max $70,000 for 2025 ($72,000 for 2026), plus $7,500 catch-up if 50+ ($8,000 for 2026) or $11,250 for ages 60-63 under SECURE 2.0 (participants with prior-year W-2 wages from the employer above the $150,000 prior-year FICA-wage threshold for 2026 per Notice 2025-67 must make catch-ups as Roth, applied through the sponsoring employer). Employee deferral deadline is December 31. NJ treatment: Solo 401(k) employee deferrals are excludable from NJ gross income under N.J.S.A. 54A:6-21. The employer match or profit-sharing share is not clearly addressed by NJ guidance, so confirm it for the taxpayer's facts; do not attribute a current NJ deduction to that share without confirmation.
How Does a SIMPLE IRA Work for Businesses With Employees?
For businesses with up to 100 employees. Employee contributions up to $16,500 for 2025; $17,000 for 2026 per IRS Notice 2025-67. Catch-up $4,000 (age 50+) for $21,000 total; super catch-up $5,250 (ages 60-63) for $22,250 total. Employer match up to 3% or 2% non-elective. Setup deadline is October 1. NJ treatment: SIMPLE IRA contributions are NOT deductible against NJ gross income; they create NJ basis.
How Does a Defined Benefit Plan Work?
Service boundary: Monaco CPA does not provide defined-benefit or cash-balance plan design or analysis; consult an actuary/TPA and your plan adviser. Defined benefit (DB) pension plans target a specified annual benefit at retirement and require actuarial calculations annually. For 2026, the §415(b) annual benefit limit is $290,000 (per IRS Notice 2025-67, up from $280,000 in 2025). DB plans can produce high federal deductions for older high-income sole proprietors, but require ERISA compliance, annual actuarial work, and continuing contribution obligations. NJ treatment: Employer contributions to a DB plan are taxable for NJ gross income tax purposes and create NJ basis recoverable in retirement; N.J.S.A. 54A:6-21 covers only 401(k) contributions.
What Are the NJ State Tax Benefits of Retirement Plan Contributions?
NJ treatment depends on the plan type per N.J.S.A. 54A:6-21. Solo 401(k): employee deferrals are excluded from NJ gross income in the applicable computation; NJ guidance does not clearly address Solo 401(k) employer contributions, so that share requires fact-specific confirmation. Defined Benefit: employer contributions are taxable for NJ because the 54A:6-21 exclusion covers only 401(k) plans. SEP-IRA and SIMPLE IRA: contributions are not deductible for NJ purposes and create NJ basis recoverable in retirement under the 3-Year Rule or General Rule. Plan choice also depends on employee coverage, plan terms, administration, and federal limits.
Key Takeaway
Retirement plan contributions may reduce FEDERAL taxable income in the contribution year, subject to contribution limits and QBI interaction. For NJ, the outcome depends on the plan: Solo 401(k) employee elective deferrals are excludable from NJ gross income under N.J.S.A. 54A:6-21; NJ guidance does not clearly address the employer match or profit-sharing share, so confirm that share for your facts. Defined-benefit employer contributions are taxable for NJ and create NJ basis. SEP-IRA and SIMPLE IRA contributions likewise do not produce a current-year NJ deduction and instead create NJ basis recoverable in retirement. Do not project NJ savings from an unconfirmed employer contribution. Owner contributions are not Schedule C expenses and do not reduce Schedule C profit or self-employment tax.
Related reading: Year-End Tax Moves for NJ Business Owners | S-Corp Salary vs. Distributions | Top 5 Overlooked Deductions | Tax planning services
Frequently Asked Questions
What is the maximum SEP-IRA contribution for self-employed?
For a sole proprietor or working partner, the SEP-IRA employer contribution uses adjusted plan compensation: a 25%-of-compensation plan rate works out to roughly 20% of adjusted net self-employment earnings after the deductible portion of self-employment tax and the contribution-rate adjustment. The maximum is $70,000 for 2025 ($72,000 for 2026 per IRS Notice 2025-67). For example, $100,000 of Schedule C profit does not produce a $25,000 SEP contribution; use the IRS Publication 560 worksheet. Contributions are due by the tax return filing deadline, including extensions.
How does a Solo 401(k) differ from a SEP-IRA?
A Solo 401(k) allows both employee deferrals ($23,500 for 2025, $24,500 for 2026) and employer contributions (up to 25% of compensation), potentially enabling higher total contributions. It also permits catch-up contributions of $7,500 for those age 50 and older in 2025 ($8,000 for 2026). Unlike a SEP-IRA, the employee deferral portion must be elected by December 31 of the tax year.
Do retirement plan contributions reduce NJ state taxes?
It depends on the plan type. Solo 401(k): Per N.J.S.A. 54A:6-21, employee deferrals (Box 12 Code D) are excludable from NJ gross income; NJ guidance does not clearly address employer match or profit-sharing contributions, so confirm that share for your facts. Defined Benefit plans: employer contributions are taxable for NJ because 54A:6-21 covers only 401(k) plans. SEP-IRA and SIMPLE IRA: NJ does not allow a current-year deduction; contributions create NJ basis recoverable in retirement under the 3-Year Rule or General Rule. Plan selection requires the taxpayer's contribution, employee-coverage, administration, and federal-tax facts. (Updated May 2026.)
Can I set up a retirement plan after year-end?
It depends on the plan type. A SEP-IRA can be established and funded up to the tax return due date, including extensions. Under SECURE Act sec. 201, a Solo 401(k) can likewise be adopted as late as the tax-filing deadline (including extensions) and treated as established on December 31, so employer profit-sharing contributions can still be made for the prior year; December 31 remains the deadline for employee deferral elections (with a SECURE 2.0 sec. 317 first-plan-year exception for sole proprietors). A SIMPLE IRA must be established by October 1 of the year for which contributions are being made.
Ready to File With Confidence?
Tax rules change frequently. Use the contact form to request a written scope; submitting it does not promise a call, engagement, or outcome. Greg Monaco is a NJ-licensed CPA and the firm's sole practitioner.