How to set up a solo 401(k) for locum tenens income

Step 1: Separate the W-2 job from the locum business

Start with three records: hospital 403(b) and 457(b) contribution totals, locum 1099 forms, and a separate profit-and-loss summary. The payroll records show employee deferrals; the 1099s show receipts; the profit summary subtracts business expenses. Each answers a different part of the contribution calculation.

Confirm how the locum work is treated for tax purposes: sole proprietorship, single-member LLC, or another entity. The contribution formula follows that treatment, so a CPA should confirm the setup before you estimate an employer contribution.

Treating $80,000 in 1099 receipts as $80,000 of profit can inflate the estimate. Subtract ordinary business costs first, then check the remaining compensation rules.

Step 2: What does the existing workplace plan already use?

For 2026, total the employee deferrals you made to any 401(k) or 403(b) and subtract them from the IRS limit of $24,500. Deferrals to a 457(b) do not count toward that $24,500, because the 457(b) has its own limit. Employer contributions do not use the employee-deferral limit either. Ask the hospital plan administrator whether the 457(b) is governmental or nongovernmental and whether either plan has special contribution restrictions.

If your salary deferral is $18,000, only $6,500 of the shared employee limit remains for a solo plan. It is not another $24,500. Annex Wealth Management checks payroll totals against plan statements because a late payroll update can make an old estimate wrong.

Step 3: Gather the paperwork that proves eligibility

Collect 1099-NEC or 1099-K records, business bank statements, an expense ledger, and the Schedule C or entity tax return. If a solo plan already exists, find its adoption agreement too. The paperwork should support both the business income and the plan's terms.

Ask the custodian for its adoption deadline, account registration requirements, any restatement requirements, and the beneficiary form. An ordinary brokerage account is not a solo 401(k). The business name, tax identification number, owner name, and plan year should match across the adoption paperwork and account.

Titling the account as a personal IRA, or missing the solo-plan trust paperwork, can force a correction, amended records, and possible tax reporting. Reena should verify the plan document and account title before contributing; fixing the mistake can mean contacting the custodian and tax preparer to revise the records.

Step 4: Calculate the employee and employer pieces

Use whatever remains of the shared employee limit for an employee deferral. Calculate the employer contribution separately, using eligible self-employment compensation after required adjustments. Gross receipts are not the contribution base, and there is no safe percentage to apply to every locum contract.

Have a CPA or plan administrator confirm the compensation base and the formula for your business entity. The IRS 2026 total defined contribution limit is $72,000, including employee and employer contributions; catch-up amounts, where applicable, are treated separately under the applicable rules.

For a usable estimate, write down four numbers: the employee deferral already made, remaining employee room, eligible business compensation, and plan maximum. Annex Wealth Management then sets those figures beside the household's monthly budget. A dollar already promised to a loan payment or a practice expense cannot also fund a contribution.

Step 5: Reena's timing comparison, shown with round numbers

Reena, a hypothetical 38-year-old hospital-employed anesthesiologist, is married to a public school teacher and has two children under age 6. They have about $310,000 in federal loans, $520,000 saved across a 403(b) and 457(b), and four years left toward PSLF. Reena earns $80,000 in locum receipts; after expenses and required adjustments, assume $50,000 of eligible business profit. Her hospital 403(b) already receives $18,000 in employee deferrals. Any 457(b) deferrals sit under that plan's separate limit and are left out of the math below.

The 2026 IRS employee limit is $24,500. Subtract $18,000 in W-2 deferrals: $24,500 - $18,000 = $6,500 of employee room. Assume Reena's plan and compensation support a $10,000 employer contribution. Add the pieces: $6,500 + $10,000 = $16,500 that could go into the solo plan, subject to the plan terms and overall limit.

If Reena waits two years and the W-2 deferral and locum profit stay the same, she forgoes two years of employer contribution capacity: $10,000 x 2 = $20,000 before investment results. Waiting five years under those same assumptions means $10,000 x 5 = $50,000 of foregone capacity. Those are contributions the plan might permit, not investment gains or promised tax savings.

The comparison below assumes $600 in annual administration cost and $10,000 in annual employer contribution capacity. The contribution capacity exceeds that cost in year one, but the cost is still real and does not create contribution room.

Step 6: When does the usual advice fail?

A solo 401(k) may not fit if the locum business has no eligible profit, has employees who must receive plan coverage, already participates in another plan, or earns too little to justify administration. Another employer's plan does not automatically block a solo plan, but ownership and business relationships can change the analysis.

The employee deferral limit does not become available twice just because you own two businesses. Controlled-group and affiliated-service-group rules can require businesses to be considered together. A CPA or third-party administrator should review an overlap among physician practice, hospital work, and locum entity before the account is opened.

Step 7: Ask the administrator about deadlines and corrections

Ask when the plan must be adopted, when contributions must be deposited, whether each deposit is employee or employer money, and how the plan corrects an excess. For 2026, verify the current IRS deadline that applies to your business type and filing method; deadlines can differ, so don't rely on a date remembered from another year.

Opening an account, depositing money, and checking the plan document afterward can leave a contribution unsupported. The custodian may require corrective distributions and revised tax reporting. Check the signed adoption agreement and account registration before sending money, then save the confirmation.

Step 8: Questions for the CPA or advisor

Bring the questions that settle the calculation before you sign plan paperwork. Annex Wealth Management can review how the W-2 deferrals, locum compensation, and monthly spending fit together; the CPA or plan administrator should confirm entity-specific tax and plan rules.

• Which W-2 deferrals count against my $24,500 shared employee limit?
• What eligible compensation figure supports the employer contribution?
• Does another business or employee trigger broader coverage rules?
• Which form reports the contribution, and who checks for an excess?

Step 9: What should Reena bring to Annex Wealth Management?

Reena should bring the 403(b) and 457(b) statements, payroll deferral totals, 1099 records, business expenses, entity paperwork, and proposed solo-plan adoption materials. Annex Wealth Management can then discuss whether the account addresses a real tax and cash-flow issue after loan payments and household spending, not simply whether another account can be opened.

Ask whether the expected employer contribution justifies the account's administration cost and paperwork for this year's profit. Investments can lose value, so contribution room alone does not settle how much to invest or when.