If you're self-employed — freelancer, independent contractor, sole proprietor, or single-member LLC owner — two retirement accounts dominate the landscape: the SEP-IRA and the Solo 401(k). Both share the same $72,000 maximum contribution limit for 2026, but they reach that limit very differently — and at lower income levels, the difference in how much you can actually contribute (and therefore how much tax you can defer) is substantial.
The core distinction is structural. A SEP-IRA is employer-only: for a sole proprietor your contribution is capped at 20% of net profit after the deduction for half of your self-employment tax (the 25% plan rate expressed as 25% ÷ 1.25 = 20%, about 18.587% of net Schedule C profit), regardless of how high you set it. A Solo 401(k) has two components — an employee elective deferral of up to $24,500 (available in full even at modest income levels) plus an employer profit-sharing contribution of up to 20% of net profit after the SE tax deduction (the same formula as the SEP-IRA). That employee deferral component is the reason Solo 401(k)s allow up to $24,500 more than SEP-IRAs until the Solo 401(k) reaches the $72,000 ceiling at about $252,000 of net profit.
This guide walks through the contribution formulas, worked examples at five income levels, the administrative differences, and the exact federal income tax savings at the 22% and 24% brackets — all using verified IRS figures from IRS Publication 560 and IRS Retirement Topics. Use our Self-Employment / 1099 Tax Calculator to model your own net income and tax bracket.
Understanding why these two accounts behave differently starts with their structure. Both are designed for self-employed individuals with no full-time employees (other than a spouse), and both grow tax-deferred — but their contribution mechanics are fundamentally different.
A SEP-IRA treats you as both the employer and the employee — but only allows the employer-side contribution. That contribution is capped at 25% of compensation, up to $72,000 for 2026. For a sole proprietor, Publication 560 applies a reduced rate of 20% (the 25% plan rate divided by 1.25, because the contribution itself reduces the earnings it is based on) to your net Schedule C profit minus the deductible half of your SE tax. The result is 0.20 × (1 − 0.5 × 0.153 × 0.9235) = 0.20 × 0.929352 = 0.185870, or about 18.587% of net Schedule C profit, at incomes where SE income is below the Social Security wage base. There is no employee deferral component and no catch-up contribution for those aged 50 or older.
The practical implication: at $60,000 of net SE income, the maximum SEP-IRA contribution is roughly $11,152 (18.587% × $60,000). That is the ceiling — you cannot contribute more, regardless of your desire to shelter income.
A Solo 401(k) — also called an Individual 401(k) or Self-Employed 401(k) — treats you as both an employee and an employer, and allows contributions from both roles:
At $60,000 of net SE income, a Solo 401(k) allows: $24,500 employee deferral + approximately $11,152 employer contribution = $35,652 total — more than three times the SEP-IRA ceiling at the same income. This is the advantage that makes the Solo 401(k) the default recommendation for most self-employed people who haven't yet reached the $72,000 ceiling.
At high income levels, the SEP-IRA formula (20% of net profit after the SE tax deduction) alone can reach $72,000. Working the formula with the 2026 Social Security wage base of $184,500 (and no W-2 wages): the Solo 401(k) reaches the $72,000 ceiling when the employer share reaches $47,500 ($72,000 − $24,500), at about $252,000 of net profit; the SEP-IRA reaches $72,000 only at about $376,000 of net profit. Between about $44,000 and $252,000 of net profit the Solo 401(k) allows exactly $24,500 more than the SEP-IRA; above $252,000 the gap shrinks, and above about $376,000 both plans allow the same $72,000.
The SEP-IRA is the most popular retirement account for self-employed individuals — primarily because of how simple it is to establish and maintain. There is no plan document, no annual IRS filing, and no December 31 deadline to worry about.
A SEP-IRA can be opened at any major brokerage — Fidelity, Vanguard, Schwab, and Charles Schwab all offer no-fee SEP-IRA accounts. The process takes approximately 15 minutes online. There is no annual form to file with the IRS. You simply contribute and invest, and the brokerage reports your contributions on Form 5498.
The SEP-IRA's standout flexibility: you can open a SEP-IRA and make your contribution for the prior tax year up to the due date of your return including extensions. For a sole proprietor or single-member LLC who files for an extension, that means you have until October 15 to both open and fund a SEP-IRA for the previous calendar year. This makes the SEP-IRA ideal for self-employed individuals who don't know their final income until they are preparing their return.
The precise SEP-IRA contribution formula for a sole proprietor (IRS Publication 560, Deduction Worksheet for Self-Employed) is: (1) net earnings from self-employment = net Schedule C profit × 0.9235; (2) SE tax = 12.4% of net earnings up to the $184,500 Social Security wage base, plus 2.9% of all net earnings; (3) net compensation = net Schedule C profit − 50% of SE tax; (4) SEP-IRA maximum = 20% × net compensation, capped at $72,000 (20% is the 25% plan rate reduced under Publication 560 because the contribution itself reduces your earnings). Below about $199,800 of net profit this simplifies to approximately 18.587% of net Schedule C profit.
Example at $200,000 net Schedule C profit:
At this income level a Solo 401(k) still allows $24,500 more than the SEP-IRA: the same $37,177 employer contribution plus the $24,500 employee deferral is $61,677, which is still below the $72,000 ceiling.
Source: IRS Publication 560 — Retirement Plans for Small Business.
The Solo 401(k) requires more setup effort than a SEP-IRA but pays off substantially for self-employed individuals with net profit below about $252,000 (where it allows $24,500 more than a SEP-IRA) — and for those aged 50 or older who want the catch-up contribution.
The Solo 401(k) has two contribution buckets:
Employee elective deferral (traditional or Roth): Up to $24,500 in 2026. The deferral is a flat dollar amount rather than a percentage of profit, but it cannot exceed your net compensation. If your net profit is $40,000, your compensation after the SE tax deduction is $37,174, so you can defer $24,500 as an employee; the employer profit-sharing component is then limited to $6,337 (the Publication 560 worksheet caps it at one-half of the compensation left after the deferral: ($37,174 − $24,500) ÷ 2), for a total of $30,837. This bucket is what makes the Solo 401(k) so powerful at moderate incomes. If you're age 50 or older, the deferral limit rises to $32,500 (the $24,500 base plus $8,000 catch-up).
Employer profit-sharing contribution: Up to 20% of net profit after the SE tax deduction (the same formula as SEP-IRA). Combined with the employee deferral, total contributions cannot exceed $72,000 ($80,000 if age 50+).
| Account Type | Max Contribution |
|---|---|
| SEP-IRA (20% × $55,761*) | ~$11,152 |
| Solo 401(k) employee deferral | $24,500 |
| Solo 401(k) employer (20% × $55,761*) | ~$11,152 |
| Solo 401(k) total | ~$35,652 |
*Net compensation at $60,000 of net profit: SE tax = $60,000 × 0.9235 × 0.153 = $8,478; half = $4,239; $60,000 − $4,239 = $55,761. Employer contribution = 20% × $55,761 = $11,152 (the Publication 560 rate for a sole proprietor). The $24,500 deferral fits because the worksheet allows the employer share up to one-half of ($55,761 − $24,500) = $15,631. Exact amounts depend on your specific Schedule C figures.
A Solo 401(k) has a stricter timeline than a SEP-IRA. Under an existing plan, employee deferrals must be elected by the end of the tax year and can then be made by the tax return filing deadline, including extensions; employer contributions can also be made up to the return due date. For 2023 and later years, however, a sole proprietor with no employees can adopt a new Solo 401(k) after the end of the tax year, provided the plan is adopted by the tax filing deadline (without extensions), so missing December 31 is no longer always fatal for a first-year plan (IRS Publication 560). A SEP-IRA remains the more flexible option because it can be opened and funded up to the deadline including extensions.
Solo 401(k) plans with total plan assets exceeding $250,000 must file Form 5500-EZ with the IRS annually. This is the main administrative burden versus a SEP-IRA. If your Solo 401(k) balance is below $250,000, no annual filing is required. Most brokerage custodians (Fidelity, Schwab, TD Ameritrade) will send you a reminder when your balance approaches the threshold. The form itself is relatively straightforward, but it is an obligation you need to track.
The table below shows the approximate maximum contribution for a SEP-IRA versus a Solo 401(k) at five net self-employment income levels for 2026. All figures assume the taxpayer is under age 50 (add $8,000 to Solo 401(k) totals for those 50+) and assume no W-2 wages, and use the Publication 560 formula for the employer component (20% × (net profit − half of SE tax), which is about 18.587% of net Schedule C profit below roughly $199,800; above that the SE tax is capped at the $184,500 wage base).
| Net SE Income | SEP-IRA Max | Solo 401(k) Max | Extra via Solo 401(k) |
|---|---|---|---|
| $40,000 | ~$7,435 | ~$30,837 (24,500 + 6,337*) | +$23,402 |
| $60,000 | ~$11,152 | ~$35,652 (24,500 + 11,152) | +$24,500 |
| $80,000 | ~$14,870 | ~$39,370 (24,500 + 14,870) | +$24,500 |
| $120,000 | ~$22,304 | ~$46,804 (24,500 + 22,304) | +$24,500 |
| $200,000 | ~$37,177 | ~$61,677 (24,500 + 37,177) | +$24,500 |
*At $40,000 the Publication 560 worksheet limits the employer share to one-half of the compensation left after the deferral ($37,174 − $24,500 = $12,674, half = $6,337) instead of the full 20% ($7,435). At $200,000, total Solo 401(k) = $61,677 — still below the $72,000 ceiling. The gap stays $24,500 until the Solo 401(k) reaches $72,000 at about $252,000 of net profit (employer share $47,500 + $24,500 deferral); it then narrows and closes at about $376,000, where the SEP-IRA alone reaches $72,000.
For self-employed individuals aged 50 or older, the catch-up contribution makes the Solo 401(k) advantage even more pronounced. The 2026 catch-up contribution is $8,000, bringing the employee deferral to $32,500 and the total cap to $80,000. SEP-IRAs have no catch-up provision at any age. At a net SE income of $80,000, an over-50 Solo 401(k) participant can contribute $32,500 (employee) + $14,870 (employer) = $47,370 versus $14,870 in a SEP-IRA — a gap of $32,500.
Despite the Solo 401(k)'s contribution advantage, the SEP-IRA wins on simplicity in certain scenarios:
Both SEP-IRA and Solo 401(k) contributions are deducted from adjusted gross income — they reduce federal and state income tax at your marginal rate. Critically, retirement contributions do not reduce self-employment tax: the SE tax base (net earnings from self-employment × 92.35%) is fixed before retirement contributions are deducted. The tax savings are purely from reduced income tax.
Every dollar contributed to either a SEP-IRA or Solo 401(k) reduces federal taxable income by one dollar. The income tax saving is therefore your marginal rate applied to the contribution:
| Tax Bracket | Per $10,000 Contributed | Per $24,500 (Full Employee Deferral) | Per $46,800 (Solo 401(k) at $120k) |
|---|---|---|---|
| 22% | $2,200 | $5,390 | $10,296 |
| 24% | $2,400 | $5,880 | $11,232 |
| 32% | $3,200 | $7,840 | $14,976 |
Assumptions: single filer, standard deduction ($16,100), no other income, QBI deduction ignored. Taxable income before any contribution = $120,000 − $8,478 (half of SE tax) − $16,100 = $95,422, which sits in the 22% bracket ($50,400–$105,700).
SEP-IRA path:
Solo 401(k) path:
The Solo 401(k) produces about $5,212 more in annual federal income tax savings at this income level — all from the extra employee deferral capacity. State income tax savings are additional: each $10,000 contributed saves $930 at a 9.3% marginal state rate (California's middle bracket, for example) and nothing in a state with no income tax.
The tax savings compound in two directions. First, contributing more dollars now means more capital invested tax-deferred — at 7% annual growth, $46,800 invested instead of $22,300 more than doubles the compounding base from year one. Second, the tax dollars saved are not consumed by the IRS but can be reinvested or used for other purposes. Over a 20-year career, the difference between consistently maxing a Solo 401(k) versus a SEP-IRA at $120,000 of net income compounds into a substantially different retirement balance.
In states with income tax, retirement contributions reduce state taxable income as well. The states with the highest rates — California (up to 13.3%), Hawaii (up to 11%), New Jersey (up to 10.75%), Oregon (up to 9.9%) — amplify the savings significantly. In a zero-income-tax state (Florida, Texas, Nevada, Washington, Wyoming, Alaska, South Dakota), the total saving is the federal rate only. Per our Best States for 1099 Contractors guide, state tax can materially affect which retirement account strategy produces the best net-of-tax outcome.
Source: IRS Retirement Topics — 401(k) and Profit-Sharing Plan Contribution Limits.
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