Solo 401(k) vs SEP-IRA: Self-Employed Retirement Accounts

October 9, 2026 Personal Finance
This guide has 2 parts
  1. Solo 401(k) vs SEP-IRA: Self-Employed Retirement Accounts (you are here)
  2. Self-Employed Retirement Contributions: What the Tax Data Show
In Plain Words

When you work for yourself, nobody sets up a retirement plan for you, so you build your own. Two accounts do the job. A Solo 401(k) lets you save as both the employee and the employer, so it usually shelters the most money. A SEP-IRA lets you save only as the employer, but it is simpler and can be opened as late as the extended tax-filing deadline. Many freelancers on moderate incomes do better putting their own share in as Roth, because a pre-tax contribution saves less tax than the bracket suggests.

Why it matters: The account you pick changes how much you can save each year and how much tax you save.

In Brief

Summary: If you work for yourself with no employees other than a spouse, a Solo 401(k) usually shelters the most: a $24,500 employee deferral in 2026 plus an employer contribution of 20% of net profit after subtracting half of self-employment tax, up to $72,000 in total. A SEP-IRA gives only the employer half but is simpler and can be opened as late as the extended filing deadline. For many freelancers at moderate incomes, the deferral should go in as Roth, because a pre-tax contribution saves less tax than the bracket suggests.

  • At $90,000 of net profit, the Solo 401(k) allows $41,228.34 against the SEP-IRA’s $16,728.34; the two converge only near $376,000 of profit.
  • Contributions cut income tax but never self-employment tax, and each pre-tax dollar also shrinks the 20% qualified business income deduction, so it saves about 80% of your bracket rate.
  • The $24,500 deferral limit is shared with any 401(k) at a day job; the employer contribution is not.
  • A SEP-IRA allows no catch-up contributions; a Solo 401(k) adds $8,000 at 50 and $11,250 at 60 to 63.
  • In tax year 2023 only about 4% of returns that paid self-employment tax claimed a self-employed retirement deduction.

About 21 minutes to read. Figures and rules in this chapter last reviewed October 4, 2026.

Everything in 6.2–6.7 assumes an employer. Freelancers, consultants and owners of one-person businesses have no payroll department and no match — but they are both the employee and the employer, and can contribute in both roles. The two main vehicles are the Solo 401(k) (formally a one-participant 401(k)) and the SEP-IRA (Simplified Employee Pension).

  • Solo 401(k) — for a business owner with no employees other than a spouse. Any self-employment income qualifies, including a side business run alongside a W-2 job.
  • SEP-IRA — for any business, including one with employees; but the owner must then contribute the same percentage of pay for every eligible employee (age 21 or older, paid at least $800 in 2026, and employed in at least three of the last five years).

In a Solo 401(k) you contribute twice. As the employee you can defer up to $24,500 of earnings in 2026 (plus the $8,000 catch-up at 50 or older, or $11,250 at ages 60–63), pre-tax or Roth. As the employer you can add a profit-sharing contribution of up to 25% of compensation — which, for a sole proprietor or single-member LLC, works out to 20% of net self-employment earnings after subtracting half of the self-employment tax. The reason for 20% rather than 25%: a self-employed person’s “compensation” is defined as net earnings after the contribution itself is deducted, so 25% of what remains equals 20% of the starting figure (0.25 ÷ 1.25 = 0.20). Owners of an S corporation or C corporation who pay themselves a W-2 salary use the plain 25% of that salary. Employee and employer money together cannot exceed $72,000 in 2026, or 100% of compensation, with catch-up contributions allowed on top ($80,000 at 50 or older, $83,250 at ages 60–63). A SEP-IRA has only the employer half: the same 20%/25% contribution, capped at $72,000.

Under the Hood: Why the Solo 401(k) Holds More at Moderate Incomes

The two accounts are built from different limits. A SEP-IRA contribution is an employer contribution, and every employer contribution is capped as a percentage of pay: 25% of compensation, which is 20% of a sole proprietor’s net earnings after half of self-employment tax. A Solo 401(k) adds the elective deferral, which is capped in dollars, not as a percentage: up to $24,500 in 2026, limited only by 100% of compensation. Above both sits the $72,000 annual-additions limit on everything going into one person’s account from plans the business maintains, and a $360,000 cap on the compensation any formula may count.

The result is a gap that is fixed at $24,500 over a wide middle range, then closes. Using the volume’s arithmetic (self-employment tax of 15.3% on 92.35% of profit, the 12.4% part stopping at the $184,500 wage base), the Solo 401(k) reaches $72,000 at about $252,318 of net profit ($24,500 + 20% of $237,500 = $72,000), while the SEP-IRA’s 20% reaches $72,000 only at about $376,480. At low profits a third limit binds: total contributions cannot exceed compensation, which for a sole proprietor is the base minus the employer contribution itself. Below about $43,938 of profit (a base of $40,833, where $24,500 plus 20% of the base would exceed the other 80%: $24,500 ÷ 0.6 = $40,833), the employer contribution is cut to half of what the base leaves after the deferral. At $35,000 of profit the base is $32,527.33, and the maximum is $24,500 + ($32,527.33 − $24,500) ÷ 2 = $28,513.67, not the $31,005.47 that 20% would suggest. Only with a base of $24,500 or less (about $26,363 of profit) can the whole base go in, all of it as deferral. The SEP’s percentage design is what makes it simple and fair for a business with staff, and also what makes it smaller for a one-person business.

2026 limits as of Oct 2026: $72,000 annual additions, $360,000 compensation cap, $24,500 deferral and $800 SEP pay threshold, IRS Notice 2025-67; elective deferrals up to 100% of compensation, IRS One-participant 401(k) plans. Compensation ceiling for the self-employed (total contributions limited to the base minus the employer contribution), IRS Publication 560, Deduction Worksheet for Self-Employed. Crossover profits computed for a single filer with no other wages.
Worked Example — A Freelancer With $90,000 of Net Profit

A single freelancer under 50 reports $90,000 of net profit on Schedule C for 2026.

  • Step 1, self-employment earnings: self-employment tax applies to 92.35% of profit: $90,000 × 0.9235 = $83,115.00.
  • Step 2, self-employment tax: $83,115.00 × 15.3% = $12,716.60 (12.4% for Social Security, $10,306.26, plus 2.9% for Medicare, $2,410.34; the $184,500 Social Security wage base is not reached).
  • Step 3, the deduction for half of it: $12,716.60 ÷ 2 = $6,358.30.
  • Step 4, the base for the employer contribution: $90,000 − $6,358.30 = $83,641.70.
  • Step 5, the employer contribution: 20% × $83,641.70 = $16,728.34. Check with the 25% definition: 25% × ($83,641.70 − $16,728.34) = 25% × $66,913.36 = $16,728.34.
  • Step 6, the total: a SEP-IRA stops at $16,728.34. A Solo 401(k) adds the $24,500 employee deferral, which does not reduce the employer base: $24,500 + $16,728.34 = $41,228.34 — under both the $72,000 cap and the $66,913.36 of compensation (net earnings after the employer contribution).

Two consequences follow. Contributions reduce income tax, not self-employment tax — the $12,716.60 is owed either way. And the gap between the two accounts is widest at moderate incomes: a Solo 401(k) reaches the $72,000 cap at roughly $252,000 of net profit, a SEP-IRA only at roughly $376,000.

Four steps for 90,000 dollars of net profit: self-employment earnings are 92.35 percent, 83,115 dollars; self-employment tax at 15.3 percent is 12,716.60 dollars; half of it, 6,358.30 dollars, is deducted; the base for the employer contribution is 83,641.70 dollars
Figure c23.1 · A freelancer’s Solo 401(k) arithmetic
Account2026 maximum for this freelancerEmployees?Last day to open for 2026Worth knowing
Solo 401(k)$41,228 ($24,500 employee + $16,728 employer)No — owner and spouse onlyDec 31, 2026 in most cases; a first plan for a sole proprietor can be opened up to Apr 15, 2027Roth deferrals possible; Form 5500-EZ once year-end assets exceed $250,000
SEP-IRA$16,728 (employer only)Yes, at the same percentage of pay for each eligible employeeThe filing deadline including extensions (Oct 15, 2027 if extended)Simplest paperwork; the balance counts in the backdoor-Roth pro-rata rule (6.4)
SIMPLE IRA$20,593 ($18,100 deferral — the higher SIMPLE limit that applies automatically at employers with 25 or fewer employees — + 3% match on $83,115 = $2,493)Yes (employers with 100 or fewer employees)Oct 1, 2026Employer must match or contribute for every employee; counts in the pro-rata rule
IRA alone$7,500Not applicableContributions accepted until Apr 15, 2027Same limit for everyone with earned income; no business paperwork
Figures as of Oct 2026: IRS IR-2025-111 and Notice 2025-67; setup, deposit and SIMPLE-match rules from the IRS pages on one-participant 401(k) plans and SEP plans and Publication 560. Self-employment tax: 15.3% on 92.35% of net profit, the 12.4% part stopping at the $184,500 wage base.
Under the Hood: Why a Pre-Tax Contribution Saves Less Than Your Bracket

Two features of the self-employed tax return shrink the saving. First, self-employment tax is figured on Schedule SE from net profit before any retirement deduction; the contribution is deducted later, on Schedule 1 (line 16, “Self-employed SEP, SIMPLE, and qualified plans”), where it lowers income tax only. The freelancer above owes the full $12,716.60 of self-employment tax whatever she contributes.

Second, most sole proprietors also take the qualified business income (QBI) deduction of Section 199A: 20% of business income, limited to 20% of taxable income before the deduction, and made permanent by the One Big Beautiful Bill Act. Treasury regulations treat the deduction for retirement contributions as attributable to the business, so each pre-tax dollar contributed reduces QBI by a dollar and the QBI deduction by 20 cents. Taxable income therefore falls by only $0.80 per dollar, and a contribution in the 12% bracket saves 12% × 0.8 = 9.6%, not 12%. In the 22% bracket the saving is 17.6%; in the 24% bracket, 19.2%. Above the 2026 threshold of $201,750 of taxable income for a single filer, other QBI limits apply and the arithmetic changes.

The consequence is the Roth question in a new light. A Roth deferral gives up only the 9.6% or 17.6%, while its withdrawals escape tax entirely, so the retirement tax rate that makes pre-tax worthwhile is lower for a freelancer than for an employee in the same bracket.

Rules as of Oct 2026: retirement-plan deduction attributable to the business for QBI, 26 CFR 1.199A-3(b)(1)(vi); 20% deduction and taxable-income limit, IRS Qualified business income deduction; $201,750 single threshold for 2026 and the OBBBA amendments to §199A, IRS Rev. Proc. 2025-32. Rates assume the taxable-income limit or the 20% QBI component applies throughout.

Deadlines. A SEP-IRA is the most forgiving: it can be opened and funded for 2026 as late as the 2026 tax-filing deadline, including extensions — October 15, 2027, if you extend. A Solo 401(k) runs on two clocks. Because a self-employed person’s pay is treated as received on December 31, the employee deferral election must be in place by year-end, although the money itself can be deposited after year-end, no later than the filing deadline including extensions. The exception, since SECURE 2.0, is a sole proprietor with no employees opening a first plan: it can be adopted after year-end, up to the filing deadline without extensions (April 15, 2027, for 2026), and still receive 2026 deferrals. Employer contributions can be made up to the filing deadline including extensions.

Edge Cases: When the Standard Answer Changes

The $90,000 example assumes one sole proprietor, under 50, with no other job and no prior plan. Each of these facts moves the answer.

SituationWhat changesWhyNumber or rule
A day job with its own 401(k)Deferral room in the Solo 401(k) shrinks; employer room does notElective-deferral limits are per person, not per plan; the annual-additions limit counts only plans your business maintainsDeferring $10,000 at work leaves $24,500 − $10,000 = $14,500 of Solo deferrals, plus the full 20% employer contribution
Age 50 or olderThe Solo 401(k) gains catch-ups; the SEP-IRA gains nothingCatch-ups apply only to employee deferrals, and a SEP has none+$8,000, or +$11,250 at ages 60–63, in 2026; total up to $80,000 or $83,250
A spouse who works in the business and is paidThe household gets a second set of limits and the plan stays one-participantA one-participant plan may cover the owner and spouse; each defers from their own compensationUp to $24,500 each in deferrals in 2026, plus each spouse’s employer share, each limited by that spouse’s own compensation from the business
An S corporation ownerContributions are based on the W-2 salary onlyS corporation profit passed through to shareholders is not net earnings from self-employmentSalary $60,000: employer contribution up to 25% × $60,000 = $15,000; distributions add nothing
Two businesses, a plan in only oneOnly that business’s earnings countPlan compensation is the earned income from the business that maintains the planProfit from the business without a plan cannot raise the limit
You want Roth money beyond the deferralEmployer contributions and SEP contributions can be designated Roth, if the provider offers itSECURE 2.0 allowed Roth SEP contributions and Roth employer contributions that are fully vestedRoth employer money is included in income for the year it is allocated; the QBI and income-tax savings are given up
An existing SEP-IRA and a backdoor Roth planThe SEP balance makes the conversion mostly taxableSEP-IRAs count in the pro-rata pot on December 31 (6.4)Roll the SEP balance into a Solo 401(k) that accepts roll-ins before year-end
Solo 401(k) assets pass $250,000An annual Form 5500-EZ becomes dueOne-participant plans file only when year-end assets, combined across all the owner’s one-participant plans, exceed $250,000, or for the plan’s final yearLate penalty up to $250 a day and $150,000 a return; the IRS relief program charges $500 a return, up to $1,500 per plan
Rules as of Oct 2026: per-person deferral limit and spouse coverage, IRS One-participant 401(k) plans; no SEP catch-ups, IRS SEP FAQs; S corporation income, more than one business, and the annual-additions limit across plans you maintain, IRS Publication 560; Roth SEP and Roth employer contributions, IRS Notice 2024-2; 5500-EZ penalties, IRS Penalty relief program for Form 5500-EZ late filers.

Which to choose. At $90,000 of profit, the Solo 401(k) shelters $24,500 more than a SEP-IRA, offers Roth deferrals, and keeps pre-tax money out of the IRA pot that the backdoor-Roth pro-rata rule counts (6.4). The SEP-IRA wins on simplicity and timing: a one-page IRS form (Form 5305-SEP) and a deadline that can run into the following October. If you also have a 401(k) at a day job, the $24,500 employee-deferral limit is shared across both plans — a full deferral at work leaves only the employer half for the Solo 401(k) — while the employer contribution has its own room under the $72,000 limit.

Worked Example — Compare the Scenarios: SEP-IRA, Pre-Tax Solo 401(k) or Roth Solo 401(k)

Return to the single freelancer with $90,000 of 2026 net profit, no other income, the $16,100 standard deduction and no state income tax. Her self-employment tax is $12,716.60 in every scenario, and her deductible half is $6,358.30. She takes the QBI deduction: 20% of QBI, limited to 20% of taxable income before the deduction.

  • A, SEP-IRA only: AGI = $90,000 − $6,358.30 − $16,728.34 = $66,913.36; before QBI, $66,913.36 − $16,100 = $50,813.36; QBI deduction = the lesser of 20% × $66,913.36 = $13,382.67 and 20% × $50,813.36 = $10,162.67; taxable income $40,650.69; tax = $1,240 + 12% × ($40,650.69 − $12,400) = $4,630.08.
  • B, Solo 401(k), $24,500 pre-tax deferral: AGI = $66,913.36 − $24,500 = $42,413.36; before QBI, $26,313.36; QBI deduction 20% × $26,313.36 = $5,262.67; taxable income $21,050.69; tax = $1,240 + 12% × $8,650.69 = $2,278.08.
  • C, Solo 401(k), $24,500 Roth deferral: the Roth deferral is not deductible, so the return matches A: tax $4,630.08.
2026A: SEP-IRAB: Solo, pre-taxC: Solo, Roth
Total contributed$16,728.34$41,228.34$41,228.34
Federal income tax$4,630.08$2,278.08$4,630.08
Self-employment tax$12,716.60$12,716.60$12,716.60
Cash left to spend$55,924.98$33,776.98$31,424.98
Tax on the $24,500 at withdrawalNot shelteredOrdinary incomeNone, if qualified

The flip point. The pre-tax deferral in B saves $4,630.08 − $2,278.08 = $2,352.00 now, or $2,352 ÷ $24,500 = 9.6%. B beats C only if the $24,500 and its growth will be taxed at less than 9.6% on withdrawal; above that, the Roth wins, and C costs just $2,352 more cash this year. At $180,000 of profit, with the maximum employer contribution, the same comparison saves 17.6% (22% × 0.8), and the flip rate rises with it. Between A and B or C, the choice is about capacity, not rate: the Solo 401(k) only helps if she can save more than the SEP’s $16,728.34, which here means living on about $31,000 to $34,000 of cash after tax and contributions.

✎ Check Yourself

Five questions on this chapter. Decide on your answer first, then click “Reveal Answer.”

1. A single freelancer under 50 reports $60,000 of 2026 net profit on Schedule C. What is the most she can contribute to a SEP-IRA for 2026?

  1. $12,000.00
  2. $15,000.00
  3. $13,940.28
  4. $11,152.23
Reveal Answer

Answer: D. SE tax = $60,000 × 92.35% × 15.3% = $8,477.73; base = $60,000 − $4,238.87 = $55,761.13; 20% = $11,152.23. 25% of the base, or 20% or 25% of raw profit, overstates the limit and creates excess contributions. (Part 6.8: Self-Employed Retirement Accounts: Solo 401(k) and SEP-IRA)

2. A consultant under 50 defers the full $24,500 into her day job’s 401(k) in 2026. Her side business earns $90,000 of net profit, $83,641.70 after half of self-employment tax. What can her Solo 401(k) receive for 2026?

  1. $41,228.34
  2. $16,728.34
  3. $24,500.00
  4. $20,910.43
Reveal Answer

Answer: B. The $24,500 employee limit is shared across plans and already used at work, so only the employer half remains: 20% × $83,641.70 = $16,728.34. $41,228.34 counts the deferral twice; $20,910.43 applies 25% to the base. (Part 6.8: Self-Employed Retirement Accounts: Solo 401(k) and SEP-IRA)

3. A sole proprietor in the 12% bracket, below the QBI income threshold and taking the 20% QBI deduction, makes a $10,000 pre-tax Solo 401(k) deferral. By about how much does her federal income tax fall?

  1. $1,200
  2. $240
  3. $960
  4. $2,730
Reveal Answer

Answer: C. Each pre-tax dollar cuts QBI by a dollar and the QBI deduction by 20 cents, so taxable income falls $8,000: $10,000 × 0.8 × 12% = $960. $1,200 ignores the QBI effect; $2,730 wrongly adds 15.3% self-employment tax, which contributions never reduce. (Part 6.8: Self-Employed Retirement Accounts: Solo 401(k) and SEP-IRA)

4. Worked problem: A freelancer has $120,000 of net profit. What is the self-employment tax, and the deduction for half of it?

Reveal Answer

Answer: Earnings = $120,000 × 0.9235 = $110,820. SE tax = $110,820 × 15.3% = $16,955. Half = $8,478.

5. Worked problem: What is the maximum employer contribution (20% of profit after half the SE tax), and the total Solo 401(k) contribution with a $24,500 employee deferral?

Reveal Answer

Answer: Base = $120,000 − $8,478 = $111,522. Employer = 20% = $22,304. Total = $22,304 + $24,500 = $46,804, under the $72,000 limit.

Next in this guide (part 2 of 2): Self-Employed Retirement Contributions: What the Tax Data Show
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