“Should I offer a retirement plan to my crew?” For a long time the answer for a small contractor was “someday.” Two things have changed that. Federal tax credits now pay for much of a small plan’s first years, and in a growing list of states, an employer with no plan has to sign up for the state’s program instead.
Here are the three plans built for small businesses, what each costs you, how the credits work, and the state rules.
The SEP: you put in, the same rate for everyone
A Simplified Employee Pension is light on paperwork: the IRS lists no filing requirement for the employer. It also says “Only the employer contributes,” into an IRA set up for each eligible employee, and the employee is always 100% vested. It can be set up by adopting Form 5305-SEP, and as late as the due date, extensions included, of your business’s income tax return for the year.
For 2026, the contribution for each person cannot exceed the lesser of 25% of compensation or $72,000. For the owner, Publication 560 puts the limit at 20% of net earnings from self-employment, figured on its worksheet. You do not have to contribute every year, which suits a business with good and bad seasons. The catch is in the IRS’s own example: the contribution rate, “whether large or small,” must be uniform for all employees. If the plan’s rate is 10%, every eligible crew member gets 10% of pay, and your own contribution is figured from the same rate on the worksheet.
Eligible means an employee who has reached age 21, has worked for you in at least 3 of the last 5 years, and received at least $800 in compensation from you in 2026. A long-tenured crew is exactly who a SEP covers.
The SIMPLE IRA: the crew saves, you add a little
A SIMPLE IRA flips the funding. Employees save from their own pay, up to $17,000 for 2026 ($18,100 at certain employers), plus a $4,000 catch-up at 50 and over in most SIMPLE plans ($5,250 at ages 60 to 63). You must add one of two things every year: a dollar-for-dollar match up to 3% of each employee’s pay, or a flat 2% of pay for every eligible employee whether they save or not. The match may be lowered, but not below 1%, and in no more than 2 years out of 5.
The IRS says it is for businesses generally with 100 or fewer employees that keep no other retirement plan. An employee is eligible after earning at least $5,000 from you in any 2 earlier years and expecting $5,000 this year. All the money is the employee’s from the start. One timing rule: a first SIMPLE IRA can be set up effective on any date from January 1 through October 1 of a year, so a business that decides after October 1 generally starts the next January (a business that comes into existence after October 1 has an exception).
The solo 401(k): for an owner with no employees
The IRS calls it a one-participant 401(k): a traditional 401(k) covering a business owner with no employees, or the owner and a spouse. The owner contributes twice. As the employee, elective deferrals up to $24,500 for 2026, plus an $8,000 catch-up at 50 and over ($11,250 at ages 60 to 63). As the employer, up to 25% of compensation, with the same self-employed worksheet as the SEP. Together, before catch-ups, the additions cannot exceed $72,000 for 2026.
Two things to know before choosing it. Once the plan holds $250,000 or more at year-end, it generally has to file Form 5500-EZ. And it is a one-person plan only while you have no eligible employees: the IRS says that if you hire employees who meet the plan’s eligibility rules, you must include them, and testing rules then apply unless the plan is a safe harbor plan.
| In short | SEP | SIMPLE IRA | Solo 401(k) |
|---|---|---|---|
| Who puts money in | The employer only | Employees, plus your match or 2% | The owner, as employee and employer |
| 2026 limit | Lesser of 25% of pay or $72,000 | $17,000 deferral, $4,000 catch-up at 50+ | $24,500 deferral plus employer share, $72,000 total |
| Who must be covered | Every eligible employee, same rate | Every eligible employee | Owner and spouse; no eligible employees |
| Your yearly cost for the crew | Your choice of rate, or nothing that year | Up to 3% match, or 2% of pay | None (no crew) |
A worked example
Say a fencing contractor has two crew members who both qualify for either plan, one paid $45,000 a year and one $38,000. The figures are illustrative.
The tax credits that pay for the first years
The IRS offers three credits, claimed on Form 8881, to an employer that had no more than 100 employees who received at least $5,000 in compensation the year before. The startup and contribution credits also need a plan with at least one eligible employee who is not highly compensated, and no plan in the three prior tax years covering substantially the same employees. A SEP, a SIMPLE IRA and a 401(k) all qualify.
In the example, two eligible crew members make the startup limit $500 a year, and the 2% SIMPLE contribution of $1,660 is under $1,000 per person, so in each of the first two years the contribution credit could cover all of it. A plan covering only the owner gets neither the startup nor the contribution credit: Publication 560 counts anyone owning more than 5% of the business as highly compensated, and those credits need at least one eligible employee who is not.
The states that require you to offer something
Many states now run payroll-deduction IRA programs that an employer without a plan must join. The Georgetown University Center for Retirement Initiatives counts 15 of these “auto-IRA” programs fully open to all eligible employers as of September 20, 2026: California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Rhode Island, Vermont and Virginia. Hawaii and Washington have enacted auto-IRA programs that are not open yet (Washington’s is scheduled for July 2027); the programs Utah and Mississippi enacted in 2026 are voluntary for employers. Each state sets its own size threshold and deadlines. Three examples:
Which one fits
Whichever you choose, it becomes part of the cost of each person on the crew; Your Real Hourly Cost shows where it goes in your labor rate. If you have not hired yet, Hiring Your First Employee covers the paperwork that comes first, and if you pay yourself through an S corporation, run the plan numbers with your tax preparer alongside the salary question in Should Your LLC Elect S Corporation Status?
General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.