Retirement Plan Options for Businesses with a Mix of W-2 Employees and 1099 Contractors

So, you own a business with W-2 employees and 1099 contractors, but it’s your side gig. You spend time on it, though you don’t pay yourself. Now you want to offer your team a retirement plan. What can you actually do?

This situation is more common than it sounds. Side businesses often grow their teams before the owner starts taking a paycheck. Maybe you have a day job, or you’re putting all the profits back into the business. Either way, that one detail, not paying yourself, ends up shaping most of the choices ahead.

Start with a rule that trips up a lot of owners: 1099 workers usually aren’t “employees” for retirement plan purposes

Here’s the part that catches people off guard. Retirement plans like SEP IRAs, SIMPLE IRAs, and 401(k)s only cover people the IRS considers employees. Independent contractors don’t count. Your 1099 contractors are running their own businesses, not working for yours, at least under these rules. That means you generally cannot add them to a plan you set up, and you don’t have to.

That’s actually good news for you. Their retirement savings aren’t your responsibility to figure out. A contractor can open a Solo 401(k) or a SEP IRA of their own, funded by the money they earn from your projects. If you want to help, just let them know these options exist.

So the real question is simpler than it looked at first. What plan works best for your W-2 employees?

The plan options for your W-2 employees

1. SEP IRA:

SEP IRA is usually the easiest plan to run. You, as the employer, fund the whole thing yourself. Employees don’t put in their own money. You can even wait until your tax deadline, extensions included, to set it up and contribute for the year. The one rule to remember: you must contribute the same percentage of pay for every eligible employee, and for yourself, too, if you’re taking a paycheck. For 2026, the most you can contribute per person is 25% of pay or $72,000, whichever is smaller.

2. SIMPLE IRA:

Pick a SIMPLE IRA if your employees want more say in their own savings, meaning they can set aside part of their paychecks instead of just receiving whatever you decide to give. As the employer, you would either match what employees put in, up to 3% of their pay, or give everyone a flat 2%, whether they contribute or not. It takes a little more paperwork than a SEP, but employees get more control.

3. A standard 401(k):

Once you have W-2 employees who aren’t the owner, a Solo 401(k) is off the table. Those only work for businesses with no employees besides the owner. A regular small-business 401(k) still works, but it costs more to set up, takes more work to run, and requires yearly compliance testing that the IRA plans skip. For a small side business, this is usually more than you need, unless you’re planning to hire a lot more W-2 staff soon.

For most owners in your position, a small side business with a few W-2 employees, a SEP or SIMPLE IRA will get the job done. Save the 401(k) for later, once your team is big enough to justify the extra cost.

Now, the part where you don’t pay yourself

Here’s the wrinkle that applies directly to you. Every one of these plans figures out your own contribution based on your pay. If you’re not paying yourself anything, there’s no number to work from. So you can still set up a SEP or SIMPLE IRA and fund it for your employees, but you won’t be able to put anything in for yourself while you’re taking no pay.

That’s not a reason to skip offering the plan. Many owners fund it for their employees first and start contributing for themselves later, once they begin drawing a salary or taking profits out of the business. If saving for your own retirement matters to you sooner, it’s worth asking a tax advisor whether it makes sense to start paying yourself a small amount now, just so you can join the plan too.

What this looks like in practice

1. Check that your contractors are classified correctly. This determines who’s eligible for the plan, and it protects you from bigger problems later.
2. Choose between a SEP and a SIMPLE based on what your employees want. If you’d rather make the decisions and fund it yourself, go with a SEP. If your employees want to control their own contributions, go with a SIMPLE.
3. Bring in a payroll provider or plan administrator. Even a simple plan needs to be set up correctly, including forms like 5304-SIMPLE or 5305-SIMPLE for a SIMPLE IRA.
4. Talk to a CPA before picking a contribution percentage. Since a SEP requires the same percentage for everyone, it helps to see what different contribution levels would actually cost you before you commit.
5. Revisit your plan once you start paying yourself. Nothing here is set in stone. As your own pay changes, your best option can change too.

A retirement plan can make a small side business feel like a real employer to the people working for it, even before you’ve paid yourself anything. You don’t need the biggest or most complicated plan to do that. You need one that fits your business right now, with room to grow once you start taking a paycheck of your own.