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Solo 401(k) vs SEP IRA for the self-employed

Nicolas StrautBy Nicolas StrautPublished 10 min read

Key takeaways

  • Solo 401(k) and SEP IRA contributions share the same $72,000 limit for 2026,1 but a Solo 401(k) reaches it at about $252,000 of net profit and a SEP IRA needs about $376,000.
  • When choosing between a Solo 401(k) and a SEP IRA, start with your net profit and whether you already defer at a W-2 job. For a sole proprietor, the SEP IRA limit is 20% of net profit after subtracting half of self-employment tax, and a Solo 401(k) adds up to $24,500 on top.
  • A Solo 401(k) is the better fit for a self-employed person with no employees, while a SEP IRA is the better fit for a business with employees or an owner who already defers $24,500 at a W-2 job.
In this article

A Solo 401(k) lets a self-employed person with no employees contribute more than a SEP IRA at almost every income, because it adds a $24,500 employee deferral to the same employer contribution. Both cap at $72,000 for 2026. For a sole proprietor, that employer contribution is 20% of net profit after subtracting half of self-employment tax, not25%. This guide compares the two across eligibility, contributions, Roth and loans, paperwork, and deadlines.

Solo 401(k) vs SEP IRA at a glance

At a glance, a Solo 401(k) and a SEP IRA share the same $72,000 limit and the same employer contribution formula, and differ on the employee deferral, catch-up contributions, loans, paperwork, and the deadline to open.

Scroll horizontally to see more columns.
Solo 401(k)SEP IRA
Best forA self-employed person with no employees who wants the largest contributionA business with employees, or an owner who already defers $24,500 at a W-2 job
Who can open oneA business owner with no employees, or the owner and a spouseAny employer, including a sole proprietor; eligible employees must be covered
Employee deferral, 2026$24,500Not allowed
Employer contribution, sole proprietor20% of net profit minus half of SE tax20% of net profit minus half of SE tax
Total limit, 2026$72,000$72,000
Catch-up at 50 and older$8,000; $11,250 at 60 to 63Not allowed
Roth contributionsDeferrals, if the plan allowsAllowed if the employer chooses to accept them
LoansAllowed if the plan permitsNot allowed
Annual IRS filingForm 5500-EZ once plan assets reach $250,000Generally none
Deadline to set up for 2026Tax filing deadline, without extensions, for a new planTax filing deadline, including extensions

What is a Solo 401(k)?

A Solo 401(k) is an ordinary 401(k) plan covering a business owner with no employees, or the owner and a spouse. The IRS calls it a one-participant 401(k) and applies the same rules as any other 401(k) plan.

You contribute in two roles: as the employee, through an elective deferral, and as the employer, through a profit-sharing contribution. Both are explained under employee and employer contributions below. A dedicated Solo 401(k) guide covering setup and providers is planned but not yet live.

What is a SEP IRA?

A SEP IRA is a simplified employee pension, an IRA your business funds with employer contributions only. There is no employee deferral, and the business doesn't have to contribute every year.

Form 5305-SEP is the IRS model document for setting one up, and the guide to the SEP IRA covers the setup steps.

Solo 401(k) vs SEP IRA compared: Key differences

The key differences between a Solo 401(k) and a SEP IRA are who can open each, how contributions are made, catch-ups, Roth and loan options, paperwork, and deadlines.

Who can open each account?

Who can open each account comes down to employees. Any self-employed person with business income can open either one, but a Solo 401(k) requires that you have no employees other than a spouse.

A Solo 401(k) covers you and a spouse who works in the business. Once you hire an eligible employee, the plan is no longer a one-participant plan: it has to cover that employee as a regular 401(k), with the testing that comes with one, or you move to another plan.

A SEP IRA works with employees, but every eligible employee gets the same percentage you give yourself. Eligible means age 21 or older, worked for you in at least 3 of the last 5 years, and paid at least $800 in 2026.2

A W-2 job elsewhere doesn't stop you from opening either account for your self-employment income. How a W-2 job's 401(k) affects your limit is covered in the W-2 section below.

Employee and employer contributions

Employee and employer contributions are the core difference: a Solo 401(k) takes both, while a SEP IRA takes employer contributions only. In a Solo 401(k) you defer up to $24,500 as the employee, then add the employer contribution. A SEP IRA has no employee deferral.

The employer contribution is the same in both accounts: 20% of net profit minus half of self-employment tax for a sole proprietor. How to calculate your contribution walks through the method. Some Solo 401(k) plans also accept after-tax contributions on top of both.

Catch-up contributions at 50 and at 60 to 63

Catch-up contributions at 50 and at 60 to 63 go only into a Solo 401(k). A SEP IRA doesn't allow them. The catch-up is $8,000 at 50 and older, and $11,250 at 60, 61, 62, or 63. Catch-ups sit on top of the $72,000, so the Solo 401(k) ceiling becomes $80,000 or $83,250. What that means at each income level is in the second table under contributions at six levels of net profit.

Roth contributions and loans

Roth contributions are possible in both accounts, but loans are allowed only from a Solo 401(k). A Solo 401(k) can take Roth deferrals if the plan document allows them.

Roth SEP contributions have been allowed since 2023 under SECURE 2.0. The IRS tells employers "You may choose to accept Roth contributions, but are not required to." A Roth SEP contribution is reported to you on Form 1099-R as taxable income for the year it's made, so check that your SEP IRA provider offers a Roth option before you count on one.

If the plan permits loans, a Solo 401(k) loan can be up to the lesser of $50,000 or the greater of $10,000 or 50% of your vested balance.3 The IRS says loans are not permitted from IRA-based plans such as SEPs.

A traditional SEP IRA balance also counts with your other traditional IRAs in the pro-rata calculation for a backdoor Roth conversion, while a Solo 401(k) balance does not.

Paperwork and Form 5500-EZ

Paperwork is heavier for a Solo 401(k). A Solo 401(k) needs a written plan document from day one and files Form 5500-EZ for any year that ends with plan assets of $250,000 or more. A SEP IRA can be set up with the IRS model document, Form 5305-SEP, and generally has no annual filing requirement, including Form 5500.

Deadlines to open and fund

The deadlines to open and fund the two accounts differ. A new Solo 401(k) for 2026 must be opened by your filing deadline without extensions, while a SEP IRA can be opened and funded up to your filing deadline including extensions.

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For tax year 2026Solo 401(k)SEP IRA
Open a new planBy the filing deadline without extensions (April 15, 2027)By the filing deadline including extensions (up to October 15, 2027)
Employer contributionBy the filing deadline including extensionsBy the filing deadline including extensions

So if you decide after December 31 and have filed an extension, check the date before you choose, because only a SEP IRA stays open through October.4

How much can you contribute to a Solo 401(k) vs a SEP IRA in 2026?

You can contribute up to $72,000 to either account in 2026, but a Solo 401(k) lets you reach a given amount on far less profit, because the $24,500 deferral comes on top of the employer contribution. The total for either account is the lesser of $72,000 or 100% of your compensation. The 100% cap only applies below about $33,000 of net profit. The employer contribution is the same in both accounts, and the three steps below show how to calculate it.

Contributions at six levels of net profit

Contributions at six levels of net profit show a Solo 401(k) allowing exactly $24,500 more than a SEP IRA from about $33,000 to about $252,000, and the two meeting at $72,000 above about $376,000.

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Net profitHalf of SE taxPlan compensationSEP IRASolo 401(k)Difference
$50,000$3,532$46,468$9,294$33,794$24,500
$75,000$5,299$69,701$13,940$38,440$24,500
$100,000$7,065$92,935$18,587$43,087$24,500
$150,000$10,597$139,403$27,881$52,381$24,500
$250,000$14,787$235,213$47,043$71,543$24,500
$400,000$16,795$383,205$72,000$72,000$0

Assumes a single filer under 50, no W-2 wages, 2026 limits, and the maximum contribution to each account. A Solo 401(k) reaches $72,000 at about $252,000 of net profit and a SEP IRA at about $376,000. Below about $33,000 of net profit, a Solo 401(k) can take everything left after half of SE tax, because the limit is 100% of compensation.

With catch-up contributions, the difference between the two accounts grows for owners 50 and older.

Scroll horizontally to see more columns.
Net profitSEP IRA, any ageSolo 401(k), 50 to 59 or 64+Solo 401(k), 60 to 63
$100,000$18,587$51,087$54,337
$150,000$27,881$60,381$63,631
$250,000$47,043$79,543$82,793
$400,000$72,000$80,000$83,250

How a 401(k) at a W-2 job changes your Solo 401(k) limit

A 401(k) at a W-2 job lowers your Solo 401(k) limit, because the $24,500 deferral limit applies per person, not per plan. If you defer $24,500 at your job, your Solo 401(k) can take only the 20% employer contribution, which is exactly what a SEP IRA allows.

A SEP IRA is unaffected. The IRS confirms you can set up a SEP for your self-employment income while you participate in an employer's plan at another job. With $60,000 of side-business profit and $24,500 already deferred at work, you'll get the same $11,152 in either account.

How to calculate your Solo 401(k) or SEP IRA contribution in 3 steps

You calculate a Solo 401(k) or SEP IRA contribution with the same IRS method for both accounts. Only step 3 differs.

Step 1: Start from your Schedule C net profit

Use net profit, not gross receipts, from line 31 of Schedule C. If you have more than one Schedule C, combine them.

Step 2: Subtract half of your self-employment tax

Self-employment tax is 15.3% on 92.35% of net profit, with the 12.4% Social Security part stopping at the 2026 wage base of $184,500. Half of it is deductible, and the IRS subtracts that half before applying any contribution rate.5 Matching the IRS's own example, $100,000 of net profit minus $7,065 is $92,935.

Step 3: Take 20%, then add the deferral for a Solo 401(k)

Plan documents say 25%, but your compensation is measured after your own contribution, which makes the calculation circular. The IRS solves this with a reduced rate: the plan rate divided by one plus the plan rate, so 25% becomes 20%.

$92,935 × 20% = $18,587. That is the SEP IRA maximum. A Solo 401(k) adds the $24,500 deferral, for $43,087.

Run your net profit through the Solvent Self-Employment Tax Calculator to get the self-employment tax for step 2.

Solvent self-employment tax calculator

Calculate your self-employment tax

Open the Solvent Self-Employment Tax Calculator

Verdict: Is a Solo 401(k) or a SEP IRA better for you?

Whether a Solo 401(k) or a SEP IRA is better for you depends on your profit, whether you have employees, and whether you already defer at a W-2 job. For a sole proprietor with no employees and no workplace deferral, a Solo 401(k) allows more at every net profit below about $376,000, and above that the two are equal before catch-ups.

Choose a Solo 401(k) if

  • You have no employees other than a spouse, and your net profit is under about $376,000
  • You're 50 or older and want catch-up contributions of $8,000, or $11,250 at 60 to 63
  • You want Roth deferrals, a plan loan, or room for after-tax contributions
  • You plan a backdoor Roth conversion, since a Solo 401(k) balance stays out of the pro-rata calculation

Choose a SEP IRA if

  • You already defer $24,500 at a W-2 job, so a Solo 401(k) allows no more than a SEP IRA
  • You have, or expect to hire, eligible employees
  • You want the simplest setup, with Form 5305-SEP and generally no annual IRS filing
  • Your filing deadline has passed but your extension has not, and you have no plan open for 2026 yet

How to add your Solo 401(k) or SEP IRA contribution to your tax estimate

Once you know your contribution, run your expected net profit through the Solvent Quarterly Tax Estimator to set your next estimated payment. The estimator doesn't take a retirement contribution as an input, so How much to set aside for taxes shows how a contribution changes your reserve rate.

Frequently asked questions about Solo 401(k) vs SEP IRA

Can my spouse contribute to my Solo 401(k)?

Yes, your spouse can contribute to your Solo 401(k) if they work in the business and are paid by it, since the IRS defines the plan as covering the owner and a spouse. Your spouse then has their own $24,500 deferral and employer contribution, so a two-person household business can roughly double what one owner could save.

Is a Solo 401(k) or SEP IRA better for an S corp owner?

Whether a Solo 401(k) or SEP IRA is better for an S corp owner depends on salary, because contributions are calculated on W-2 wages, not net profit. The employer contribution is 25% of wages, not 20%. A Solo 401(k) adds the $24,500 deferral, so it usually allows more at lower salaries. LLC vs sole proprietorship explains the S corp election.

Can I move my SEP IRA into a Solo 401(k)?

Yes, you can usually move a SEP IRA into a Solo 401(k) if the plan accepts rollovers, since the IRS rollover chart allows rollovers from a SEP IRA into a qualified plan. Ask the Solo 401(k) provider before you open the account, because not every plan document accepts incoming rollovers.

Are Solo 401(k) and SEP IRA contributions tax deductible?

Yes, pre-tax Solo 401(k) and SEP IRA contributions are tax deductible. A sole proprietor deducts their own contributions on Schedule 1 of Form 1040, not on Schedule C, so the deduction lowers your income tax but not your self-employment tax.

Can I contribute to a Solo 401(k) or SEP IRA if my business had a loss?

No, you can't make a Solo 401(k) or SEP IRA contribution for yourself in a year your business had a net loss. Both limits are capped at 100% of your compensation, and a sole proprietor's compensation is net earnings from self-employment, so a loss leaves none. Wages from a separate W-2 job don't count toward that compensation.

Can you have a SEP IRA and a Solo 401(k) at the same time?

Yes, you can have both at the same time, but the IRS says an employer that maintains another plan can't use the Form 5305-SEP model document. Contributions to both plans count toward one $72,000 limit, so having both adds paperwork, not contribution room.

About the author

Nicolas Straut

Nicolas Straut

Personal and business finance writer, former Forbes contributor

Nicolas Straut writes about self-employment and quarterly tax, LLC formation and costs, and tax software for Solvent. He has written about money for about ten years, including for the fintech companies NorthOne and Fundera. He files his own taxes as a freelancer. He isn't a CPA or an enrolled agent (EA).

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This page compares federal rules for a sole proprietor with no employees, using 2026 limits from IRS Notice 2025-67. Contribution figures assume a single filer under 50 with no W-2 wages and no other retirement plan. Plan documents and custodians can be stricter than the law, so check yours before you contribute. Solvent provides educational estimates, not tax advice. Confirm your specific situation with a qualified tax professional.

Sources

  1. https://www.irs.gov/pub/irs-drop/n-25-67.pdf
  2. https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep · https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
  3. https://www.irs.gov/retirement-plans/one-participant-401k-plans · https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-loans
  4. https://www.irs.gov/publications/p560
  5. https://www.irs.gov/retirement-plans/self-employed-individuals-calculating-your-own-retirement-plan-contribution-and-deduction