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?
- How Does a Defined Benefit Plan Work?
- How Does New Jersey Treat Retirement-Plan Contributions and Distributions?
- Key Takeaway
- Frequently Asked Questions
- Request a Written Scope
Retirement-plan contribution and reporting rules differ by plan type, and New Jersey treatment likewise depends on the contribution and taxpayer involved. For a W-2 employee, an employer's SEP contribution is limited to 25% of compensation; for a sole proprietor or working partner, 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 2026 federal defined-contribution annual-additions limit is generally the lesser of 100% of compensation or $72,000, with catch-up contributions tested separately when available. Important NJ nuance per N.J.S.A. 54A:6-21: 401(k) employee deferrals ARE excludable from NJ gross income; NJ guidance resolves the employer share affirmatively: NJ-BUS-1 instructs the self-employed to deduct qualified Solo 401(k) contributions up to the federal limits, and employer contributions to qualified plans receive tax-deferred treatment under NJ wage guidance (amounts above the federal limits are not deductible for NJ). Qualified defined-benefit employer contributions generally receive tax-deferred NJ treatment and do not create previously taxed employee basis. NJ wage guidance instead includes both employee and employer SEP and SIMPLE IRA contributions in NJ wages; a self-employed owner's federal SEP or SIMPLE deduction does not itself create an NJ deduction. At distribution, apply the actual plan type, previously NJ-taxed contributions, rollover facts, Worksheet C or the applicable pension method, current return instructions, and any return-level retirement-income exclusion rather than promising a fixed tax result. (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?
For a W-2 employee, an employer's SEP contribution cannot exceed 25% of compensation. For a sole proprietor or working partner, 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 SEP employer contribution remains subject to that separate percentage limit and the $70,000 maximum for 2025 ($72,000 for 2026 per IRS Notice 2025-67). Separately, aggregate annual additions across defined-contribution plans maintained by the employer are generally limited under Section 415(c) to the lesser of 100% of compensation or the applicable $70,000/$72,000 dollar ceiling, with contributions coordinated across those plans. Setup, maintenance, and filing obligations depend on the plan and facts. The contribution deadline generally extends to the employer's tax-return due date, including extensions, and an employer contribution generally uses the same percentage for eligible employees. NJ treatment: NJ wage guidance includes both employee and employer SEP contributions in NJ taxable wages. A self-employed owner's federal SEP deduction does not itself create an NJ deduction. Track any contribution previously taxed by NJ as potential IRA basis and use Worksheet C to separate that basis from earnings and other untaxed amounts when distributions occur.
How Does a Solo 401(k) Compare With a SEP-IRA?
A Solo 401(k) may combine employee deferrals ($23,500 for 2025, $24,500 for 2026 per IRS Notice 2025-67) with employer contributions. The employer contribution is based on W-2 compensation for a corporate employee and on the adjusted net-earnings computation for a sole proprietor or working partner. Annual additions are generally limited to the lesser of 100% of compensation or $70,000 for 2025 ($72,000 for 2026), with a separate $7,500 catch-up for age 50 or older in 2025 ($8,000 for 2026) or $11,250 for ages 60 through 63 under SECURE 2.0. For 2026, if the plan permits catch-up contributions, a participant whose 2025 FICA wages under Section 3121(a) from the employer or employers sponsoring the plan (generally Social Security wages reported in Form W-2 Box 3, subject to applicable aggregation rules) exceeded $150,000 must designate any catch-up contribution as Roth; self-employment income alone is not that FICA-wage input. The statutory requirement applies for 2026 under a reasonable, good-faith interpretation, while the final-regulation provisions generally apply beginning in 2027. Employee deferral elections are generally prospective, subject to the SECURE 2.0 section 317 first-plan-year exception described below. Form 5500-EZ is generally required for each one-participant plan when the combined end-of-year assets of all one-participant plans maintained by the employer exceed $250,000, and a final return is required for the final plan year regardless of asset value. NJ treatment: Solo 401(k) employee deferrals are excludable from NJ gross income under N.J.S.A. 54A:6-21, and published NJ guidance resolves the employer share affirmatively: NJ-BUS-1 instructs the self-employed to deduct qualified Solo 401(k) contributions up to the federal limits, and employer contributions to qualified plans receive tax-deferred treatment under NJ wage guidance. Amounts above the federal limits are not deductible for NJ, and the deduction assumes a qualified plan.
How Does a SIMPLE IRA Work for Businesses With Employees?
A SIMPLE IRA or SIMPLE 401(k) is generally available to an employer that had 100 or fewer employees who received at least $5,000 of compensation in the preceding year and generally did not maintain another qualified plan under which contributions were made or benefits accrued for service in that year, subject to the collective-bargaining exception, the two-year grace period after ceasing to meet the employee limit, and special acquisition, disposition, and similar-transaction rules. For a SIMPLE IRA, the plan generally must cover each employee who received at least $5,000 in any two preceding years and is reasonably expected to receive at least $5,000 in the current year, subject to permitted exclusions and less-restrictive plan terms. Employee salary-reduction contributions are limited to $16,500 for 2025 and $17,000 for 2026 per IRS Notice 2025-67. The separate $18,100 salary-reduction and $3,850 catch-up limits under Section 408(p)(2)(E) apply automatically for a qualifying eligible employer that had 25 or fewer employees who received at least $5,000 of compensation in the preceding year; an employer with 26-100 such employees may elect those limits only with the required enhanced 4% match or 3% non-elective contribution. For 2026, the general SIMPLE catch-up limit is $4,000 for an eligible participant age 50 or older, while the higher age-60-through-63 catch-up limit is $5,250. The employer must make a dollar-for-dollar match up to 3% of compensation (reducible to no less than 1% in no more than 2 of 5 years, with notice) or a 2% non-elective contribution for all eligible employees (4% match or 3% non-elective under the enhanced election). The employer may also make an additional uniform non-elective contribution for each eligible employee up to the lesser of 10% of compensation or $5,300 for 2026 (Section 408(p)(2)(A)(iv), Notice 2025-67). A SIMPLE IRA setup deadline is generally October 1 (a business formed after October 1 may set up as soon as administratively feasible; an employer that previously maintained a SIMPLE must use a January 1 effective date). NJ treatment: NJ wage guidance includes both employee and employer SIMPLE IRA contributions in NJ taxable wages. A self-employed owner's federal SIMPLE deduction does not itself create an NJ deduction. Track amounts previously taxed by NJ as potential IRA basis and use Worksheet C to separate that basis from earnings and other untaxed amounts when distributions occur.
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 ceiling is the LESSER of 100% of the participant's highest-three-year average compensation or $290,000 (per IRS Notice 2025-67, up from $280,000 in 2025), before applicable commencement-age, participation, service, benefit-form, and plan-specific adjustments. This is a benefit ceiling, not a contribution amount. Contribution and deduction amounts depend on the actuarial design, participant facts, funding rules, and applicable limits, and the plan carries continuing contribution and administrative obligations (plans covering only an owner, or an owner and spouse, are generally outside ERISA Title I, though tax-qualification, funding, and filing rules still apply; covering a common-law employee brings ERISA in). NJ treatment: Qualified employer contributions to a defined-benefit plan generally receive tax-deferred treatment for New Jersey, are not current taxable wages, and do not create previously taxed employee basis. At distribution, determine NJ gross-income inclusion from the plan, rollover, and previously taxed contribution facts under the current return instructions; any available retirement-income exclusion and tax effect are complete-return questions.
How Does New Jersey Treat Retirement-Plan Contributions and Distributions?
NJ treatment depends on the contribution, plan, entity, and taxpayer capacity under N.J.S.A. 54A:6-21, NJ-BUS-1, NJ wage guidance, GIT-1&2, and the current return instructions. Solo 401(k): employee deferrals are excluded from NJ gross income in the applicable computation; NJ guidance resolves the employer share affirmatively: NJ-BUS-1 instructs the self-employed to deduct qualified Solo 401(k) contributions up to the federal limits, and employer contributions to qualified plans receive tax-deferred treatment under NJ wage guidance (amounts above the federal limits are not deductible for NJ). Defined Benefit: qualified employer contributions generally receive tax-deferred NJ treatment, are not current wages, and do not create previously taxed employee basis. SEP-IRA and SIMPLE IRA: NJ wage guidance includes both employee and employer contributions in NJ wages, and a self-employed owner's federal deduction does not itself create an NJ deduction. Previously NJ-taxed IRA contributions may create basis recoverable under Worksheet C; earnings, untaxed rollover amounts, pension-method rules, and any return-level retirement-income exclusion are computed separately. 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, deduction rules, and QBI interaction. For NJ, treatment depends on the contribution and plan: Solo 401(k) employee elective deferrals are excludable from NJ gross income under N.J.S.A. 54A:6-21; NJ guidance resolves the employer share affirmatively: NJ-BUS-1 instructs the self-employed to deduct qualified Solo 401(k) contributions up to the federal limits, and employer contributions to qualified plans receive tax-deferred treatment under NJ wage guidance (amounts above the federal limits are not deductible for NJ). Qualified defined-benefit employer contributions generally receive tax-deferred NJ treatment and do not create previously taxed employee basis. NJ wage guidance includes employee and employer SEP and SIMPLE IRA contributions in NJ wages, while a self-employed owner's federal deduction does not itself create an NJ deduction. Track previously NJ-taxed IRA contributions as potential basis and apply the current distribution and return rules rather than assuming a fixed tax result. The residual checks on the Solo 401(k) employer share are plan qualification and the federal-limit cap. 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
Official sources: IRS Notice 2025-67 (opens in a new tab) | IRS Publication 560 (opens in a new tab) | IRS Notice 2024-2 (opens in a new tab) | IRS catch-up guidance (opens in a new tab) | IRS final Roth catch-up regulations (opens in a new tab) | IRS defined-benefit limits (opens in a new tab) | IRS Form 5500-EZ instructions (opens in a new tab) | NJ wage guidance (opens in a new tab) | NJ business-income guidance (opens in a new tab) | NJ GIT-1&2 retirement-income guidance (opens in a new tab)
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) may combine employee deferrals ($23,500 for 2025, $24,500 for 2026) with employer contributions. The employer component uses W-2 compensation for a corporate employee and the adjusted net-earnings computation for a sole proprietor or working partner. Annual additions are subject to the federal compensation and combined-plan limits, with catch-up contributions tested separately. Employee deferrals generally require a prospective election; the SECURE 2.0 section 317 first-plan-year exception is described below.
Do retirement plan contributions reduce NJ state taxes?
It depends on the contribution, plan, entity, and taxpayer capacity. 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 resolves the employer share affirmatively: NJ-BUS-1 instructs the self-employed to deduct qualified Solo 401(k) contributions up to the federal limits, and employer contributions to qualified plans receive tax-deferred treatment under NJ wage guidance (amounts above the federal limits are not deductible for NJ). Defined Benefit plans: qualified employer contributions generally receive tax-deferred NJ treatment and do not create previously taxed employee basis. SEP-IRA and SIMPLE IRA: NJ wage guidance includes both employee and employer contributions in NJ wages, while a self-employed owner's federal deduction does not itself create an NJ deduction. Worksheet C separates previously NJ-taxed IRA basis from earnings and untaxed amounts at distribution; other pension methods, rollovers, any retirement-income exclusion, and the complete return determine the result. (Updated May 2026.)
Can I set up a retirement plan after year-end?
It depends on the plan type. A SEP-IRA can generally be established and funded by the employer's tax-return due date, including extensions. Under SECURE Act section 201, an employer may adopt a qualified plan by the employer-return due date, including extensions, and treat it as adopted on the last day of the prior tax year for employer-contribution purposes. Elective deferrals are generally prospective. SECURE 2.0 section 317 separately permits an individual who owns the entire interest in an unincorporated business and is its only employee to adopt a new 401(k) after year-end and make a first-plan-year deferral by the individual's unextended return due date. A SIMPLE IRA generally must be established by October 1, subject to the new-employer and prior-plan rules.
Request a Written Scope
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.
