2025 Year-End Retirement Deductions for Business Owners

The clock is ticking on 2025. Your retirement is one year closer, and you still have time before December 31 to lock in powerful 2025 year-end retirement deductions.

With a few intentional moves, you can:

• Boost your retirement savings,
• Lower your current-year tax bill, and
• Take advantage of new and improved SECURE 2.0 credits.

Below are five opportunities to review before December 31. The limits and thresholds here reflect the IRS’s 2025 inflation adjustments.

1. Establish your 2025 retirement plan before year-end.
2. Claim the enhanced retirement plan start-up tax credit (up to $15,000 over three years).
3. Use the new small employer pension contribution credit (up to $1,000 per employee).
4. Earn an automatic-enrollment credit of up to $1,500 over three years.
5. Consider converting to a Roth IRA for long-term tax-free growth.

1. Set Up Your 2025 Retirement Plan Before December 31

First question: do you already have a retirement plan in place for your business for 2025?

If not, and you have cash available to contribute, you still have time to put a plan in place and claim a 2025 tax deduction.

For most defined contribution plans (such as 401(k) plans), if you are an owner-employee, you wear two hats: you are both the employee and the employer, whether you operate as a corporation or as a sole proprietorship. That’s a good thing — it means you can make:

• Employee salary deferrals, and
• Employer contributions,

allowing you to put a substantial amount away for retirement while reducing your taxable income.

Your specific plan document controls the deadlines for employee and employer contributions that will count for 2025, so you need to know exactly what your plan allows.

Example: Solo owner of an S corporation with a 401(k)

Assume:

• You are the only employee in your S corporation.
• You want to set up an individual (solo) 401(k) for the 2025 calendar year.

To get a 2025 deduction:

• You must have the 401(k) plan in place on or before December 31, 2025.
• You must make your 2025 employee contribution by December 31, 2025.

For 2025, the IRS increased the 401(k) salary deferral limit to $23,500 for employee elective deferrals. Depending on your age, you may also qualify for catch-up contributions.

For 2025, the employee deferral limits look like this:

• $23,500 if you are under age 50,
• $31,000 if you are age 50–59 or age 64 or older, and
• $34,750 if you are age 60–63 (the “super” catch-up window).

In addition to those employee deferrals, your S corporation can make an employer contribution of up to 25% of your compensation. That employer contribution can generally be made any time up to the S corporation tax return due date (for example, March 15, 2026, or September 15, 2026 with extensions).

Between you and your S corporation, the maximum total contribution to your 401(k) or similar account for 2025 is:

• $70,000 if you are under age 50,
• $77,500 if you are age 50–59 or age 64 or older, and
• $81,250 if you are age 60–63.

If you’re a solo owner-operator (incorporated or not), a properly structured solo 401(k) can be one of the most powerful retirement tax tools you have.

2. Use the Enhanced Retirement Plan Start-up Tax Credit (Up to $15,000)

If both of these are true:

• You have employees (you are not a pure solo owner with no staff), and
• Your business does not currently sponsor a retirement plan,

then SECURE 2.0 made the “start-up” tax credit much more generous for you.

By establishing a new qualified retirement plan — such as a profit-sharing plan, a 401(k), a defined benefit pension plan, a SIMPLE IRA, or a SEP — your business may qualify for a non-refundable tax credit equal to the greater of:

• $500, or
• The lesser of:
  • $250 × the number of non–highly compensated employees eligible to participate, or
  • $5,000.

For employers with 50 or fewer employees, the credit can cover 100% of qualified start-up costs. For employers with 51–100 employees, it generally covers 50% of those qualified costs. Qualified start-up costs include:

• Ordinary and necessary expenses to establish or administer the plan, and
• Expenses for retirement-related employee education about the plan.

The credit can apply in the year the plan starts and the next two tax years — up to $5,000 per year, or $15,000 total. Any remaining costs above the credit can generally be deducted as ordinary and necessary business expenses.

To qualify, in the year before the credit begins:

• You must have had no more than 100 employees, each with at least $5,000 in compensation, and
• The plan must have at least one participant who is not a highly compensated employee.

You can find the IRS summary of this credit under the Retirement Plans Startup Costs Tax Credit guidance and in the instructions to Form 8881.

There is also a technical correction that now allows employers joining certain multi-employer plans to qualify for the start-up credit, even if the plan itself has existed for more than three years.

3. Claim the Small Employer Pension Contribution Tax Credit (Up to $1,000 per Employee)

SECURE 2.0 also created a separate credit for the employer contributions you make on behalf of your employees. This small employer pension contribution tax credit is effective for 2023 and later years.

In general:

• The credit can be up to $1,000 per employee.
• It applies to an “eligible employer” that establishes a qualifying defined contribution plan.
• In the first year your plan is effective, you can receive a credit of up to 100% of your qualifying employer contributions, capped at $1,000 per employee.

After the first year, the dollar cap remains at $1,000 per employee, but the percentage of employer contributions that qualify for the credit phases down:

• 100% in year 2,
• 75% in year 3,
• 50% in year 4,
• 25% in year 5,
• 0% in year 6 and beyond.

You do not get this credit for contributions to a defined benefit plan or for employee elective deferrals.

If you have between 51 and 100 employees, the credit is reduced by 2% for each employee over 50. If you have more than 100 employees, you don’t qualify for this particular credit. You also don’t get the credit for any employee whose 2025 wages exceed the applicable IRS wage cap for the year.

The mechanics of this credit — along with the start-up and auto-enrollment credits — are built into IRS Form 8881 instructions.

Example: Employer contributions for 30 employees

Suppose you establish a retirement plan this year and contribute $1,000 to each of your 30 employees’ retirement accounts. Your small employer contribution credit could be:

$30,000 credit = $1,000 × 30 employees

subject to the employee-count and wage limitations above.

4. Add Automatic Enrollment and Get an Extra $500 Tax Credit (Up to $1,500)

SECURE 2.0 added another non-refundable credit: up to $500 per year for three years, beginning with the first taxable year in which you, as an eligible small employer, include an automatic contribution arrangement in a qualified plan (such as a 401(k) or SIMPLE IRA).

Many new 401(k) and 403(b) plans established in 2025 or later are required to include automatic enrollment, but the credit can still apply if you are an eligible small employer and your plan meets the rules.

Key points:

• The credit is up to $500 per year, for up to three years.
• It is in addition to the start-up credit and the small employer contribution credit, and applies to both new and certain existing plans when auto-enrollment is added.
• You do not have to incur significant new cash out-of-pocket to trigger this credit — it’s based on adding an eligible automatic contribution arrangement.

To qualify as an eligible small employer for this credit, you generally must have had no more than 100 employees during the preceding year who each earned at least $5,000 in compensation. The IRS explains how this works in more detail in the Form 8881 instructions.

Solo business owner-operators with no employees do not qualify for this automatic enrollment credit because they are treated as highly compensated employees and they have no other employees.

5. Consider Converting to a Roth IRA

Finally, consider whether converting some or all of your traditional IRA or 401(k) balance to a Roth IRA makes sense for you.

A Roth conversion is a taxable event now, but it can lead to much more flexible and potentially tax-free withdrawals later. If your investments perform well inside the Roth and you don’t need the money in the short term, the long-term benefits can be substantial.

Before you convert, you need to know:

• How much additional taxable income the conversion will create this year, and
• Where the cash to pay that tax will come from (ideally, not from the retirement account itself).

Why a Roth IRA can be attractive

• You contribute after-tax dollars, and if you follow the rules, qualified withdrawals are tax-free. (The IRS explains the difference in detail on its Traditional and Roth IRAs page.)
• You can withdraw your prior Roth contributions at any time, tax- and penalty-free, because you already paid tax on that money.
• Amounts you converted from a traditional plan to a Roth can generally be withdrawn tax-free, but distributions within five years of a particular conversion may be subject to a 10% penalty.
• If you wait until age 59½ and meet the five-year rule for your Roth IRA, your qualified withdrawals of earnings can be completely tax-free.
• Unlike traditional IRAs, original Roth IRA owners are not required to take required minimum distributions (RMDs) at age 73 — you can keep the Roth growing for as long as you live.

Why leaving money in a traditional plan can be costly

• Withdrawals before age 59½ generally trigger both income tax and a 10% penalty unless an exception applies.
• Once you reach age 73, you are usually required to begin taking RMDs from traditional IRAs and most employer plans, even if you do not need the income.
• If your heirs inherit a traditional IRA, they may owe income tax (and be subject to distribution timing rules) when they withdraw the money.

It’s usually a bad idea to tap your existing traditional retirement accounts to pay the tax on the conversion. Doing so can generate extra tax and penalties on the withdrawal itself. You want outside cash available if you decide to convert.

Two timing notes for Roth conversions

• If your business is going to show a loss this year, a Roth conversion can sometimes “soak up” that loss in a tax-efficient way because the extra income from the conversion is offset by the business loss.
• If you are considering a conversion and you are close to major thresholds (such as higher Medicare premiums or net investment income tax), work with a tax professional to model the impact before you act.

Action Checklist for 2025 Year-End Retirement Deductions

Here’s how to turn all of this into concrete action before December 31:

• Decide whether you want a solo 401(k), SEP, SIMPLE IRA, or other plan for 2025.
• Get your plan formally established before year-end if you want 2025 employee deferrals.
• Calculate how much you can contribute as both employee and employer under the 2025 limits, based on your age and compensation.
• If you have employees and no plan yet, price out a plan that qualifies for the start-up credit and small employer contribution credit.
• If you already have a plan, look at whether adding automatic enrollment would qualify you for the $500-per-year credit.
• Talk with your tax advisor about whether a Roth conversion fits your income, brackets, and long-term goals.

Remember: if you pull money out of retirement accounts too early or in the wrong way, you can face avoidable penalties and taxes.

Want help using these 2025 year-end retirement deductions?

If you’re a business owner, you don’t have to guess your way through plan choices, contribution limits, and SECURE 2.0 credits.

Schedule a Free Tax Strategy Session and we’ll walk through:

• Which type of retirement plan makes the most sense for your business,
• How much you can realistically contribute for 2025, and
• How to coordinate contributions, credits, and Roth strategies to build long-term wealth.

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