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How to claim the small employer auto-enrollment credit, Form 8881, Part II

Contributed by: KristineS, FreeTaxUSA Agent, Tax Pro

Handwritten SOLO 401K sign on cash bills, representing retirement savings and the small employer auto-enrollment credit.

If you own a single-member LLC (SMLLC) or sole proprietorship, one method of planning and saving for retirement is to add a qualified individual retirement plan, such as a solo 401(k), to your business plan. With a solo 401(k), you can make contributions as both the employee and the employer.

If you’re contributing to a solo 401(k) plan only for yourself as the business owner, both the employee and employer portions of your contribution will be entered under Deductions/Credits > Common Deductions/Credits > SEP Contributions.

These contributions can help you save for the future while also claiming a current-year tax deduction. They may even make your business eligible for certain small business credits, including the $500 small employer auto-enrollment credit on Form 8881.

Beginning in calendar year 2026 (for 2025 and later tax returns), FreeTaxUSA offers the option to claim this credit on your tax return if you’re a small business owner.

Claiming the credit

To claim the $500 credit for auto-enrollment, you must meet the following criteria:

be an eligible employer; and
add an eligible automatic contribution arrangement to your new or existing retirement plan.

If you continue maintaining the automatic contribution arrangement, you can claim the credit for each of the next two tax years after the first credit year.

To claim the auto-enrollment credit in FreeTaxUSA, follow this menu path:

Income > Business/Rental Income > Business Income (Schedule C).
Select +Add a Business or Edit next to your existing business.
On the Your Business screen, go to Expenses and Assets > Common Expenses > Edit/Add.

If you’re only claiming the $500 credit, these two screens appear immediately after the What expenses did you have? screen. You’ll see a note that you didn’t enter a deduction for a contribution. In this example, that would be correct.

Screenshot of a pension plan tax credit section. “Yes” is selected for being an eligible employer with a qualified pension plan, and the Small Employer Auto-Enrollment Credit checkbox is selected. A note below states that no deduction was entered for a pension or profit-sharing plan and directs users with qualifying contributions to the Business Expenses screen.

Screenshot of the Small Employer Auto-Enrollment Credit section. It asks whether the employer provided an auto-enrollment option for retirement savings within the past three tax years. “Yes” is selected.

With a solo 401(k), you can also make contributions for your spouse if they are an employee of the business. In that case, you can deduct the employer's portion of contributions for your spouse.

In the example below, $1,000 of employer contributions were made to the plan for your spouse, and there were no start-up costs.

Screenshot of the Small Business expenses screen for 2025. Under Labor Expenses, the Pension/Profit-Sharing Plans field shows $1,000. A blue arrow points to the $1,000 entry. Other displayed expense fields are blank.

1. Enter any other expenses you have for the business and select Save and Continue at the bottom of the screen.

2. On the next screen, select Yes at the prompt, Are you an eligible employer with a qualified pension plan?

3. Then select the Small Employer Auto-Enrollment Credit box and any other applicable boxes.

4. Select Save and continue

5. Answer Yes at the prompt, Did you provide an auto-enrollment option for retirement savings within the past three tax years?

Select Save and continue.

When done, you’ll see the employer contribution to the 401(k) for your spouse on Schedule C, Line 19.

Whether you claim an expense for a deduction or not, you’ll see a business credit of $500 populate on both Schedule 3, Line 6a and Form 3800, Part III, Line 1dd.

FreeTaxUSA values our small-business Schedule C customers, and we’re continually adding and improving features to better serve you.