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How much more does a Solo 401(k) shelter than a SEP IRA at $120,000 of net earnings?

At $120,000 of net earnings in 2025, the employer contribution is $22,304 on either plan, but the Solo 401(k) adds the $23,500 elective deferral for a $45,804 total, against $22,304 on the SEP IRA alone.

Can a SEP IRA be set up after the tax year ends?

Yes. A SEP IRA can be set up and funded as late as the due date of the business return including extensions for that year. A Solo 401(k) must be established by December 31 of the plan year, although its employer contribution can still be funded by the return due date including extensions.

What happens to a Solo 401(k) if I hire an employee?

It stops being a one-participant plan once an eligible employee joins, and the plan document, testing, and administration change with it. On a SEP IRA the same hire must be covered at the same contribution percentage as the owner, so one eligible employee earning $60,000 costs $12,000 of employer contributions at a 20% rate.

What are the 2026 Solo 401(k) limits?

The elective deferral is $24,500, the overall defined-contribution limit is $72,000, and the compensation ceiling is $360,000. The catch-up is $8,000 at age 50 or over, or $11,250 for an owner attaining age 60, 61, 62, or 63, if the plan permits it.

Taxes • 13 min read

Solo 401(k) vs SEP IRA: The Self-Employed Retirement Playbook, Worked to the Dollar

A Solo 401(k) adds a $23,500 elective deferral on top of the employer contribution; a SEP IRA has no deferral bucket at all. Worked 2025 and 2026 math at $120,000 and $300,000 of net earnings, plus the hire that breaks each plan, decides which one your income actually supports.

By Enow A. Jovial • Published 2026-11-05

The retirement question that costs five figures when answered late

A self-employed founder with no employees has two retirement plans that look similar from the outside and behave very differently on the tax return. A SEP IRA takes one kind of contribution: the employer's. A Solo 401(k) takes two: the owner's elective deferral as an employee, plus the employer's contribution on top. That second bucket is the whole story. At moderate income the Solo 401(k) shelters roughly $23,500 more than a SEP IRA in the same year, and at high income it hits the overall defined-contribution ceiling while the SEP IRA is still climbing toward it.

The choice is not about which plan is "better" in the abstract. It is about income level, whether you have employees, whether you need a Roth bucket or a loan feature, and whether you will fund the plan before the deadline that actually applies.

> [!KEY TAKEAWAY]

> A Solo 401(k) shelters more at the same income because it adds an elective deferral of $23,500 for 2025 ($24,500 for 2026) on top of the employer contribution, before the overall $70,000 ceiling for 2025 ($72,000 for 2026) caps the total. A SEP IRA has no deferral bucket, so its maximum is the employer contribution alone. The SEP IRA wins on simplicity and on late funding: it can be set up and funded as late as the tax return due date including extensions, while a Solo 401(k) must be established by December 31 of the plan year.

!IRS Publication 560 (2025) "What's New" limits: elective deferrals $23,500 for 2025 and $24,500 for 2026, defined contribution limit $70,000 for 2025 and $72,000 for 2026, and catch-up limits $7,500 and $8,000

Who this guide is for, and who should stop here

This guide is for a self-employed owner with no eligible employees other than a spouse: a sole proprietor, a single-member LLC taxed as a sole proprietorship, or a partner in a small partnership. It is written around IRS Publication 560 (2025), the IRS SEP plan page, and 26 U.S.C. §§ 401(k) and 408(k), with figures for the 2025 and 2026 tax years. If you run an S-Corp, the same plans exist but the employer contribution is computed on W-2 wages, not on net self-employment income, so the worked math below must be re-run on your salary figure, not your business profit.

Stop here and talk to a CPA before choosing if you have employees who would be eligible under a SEP, if you already maintain another qualified plan, or if you are covered by a spouse's employer plan and need to coordinate limits across plans. A Solo 401(k) is a one-participant plan by definition: the moment you hire an employee who meets the plan's eligibility rules, the plan stops being a one-participant plan and the compliance picture changes entirely. A SEP IRA, by contrast, must cover every eligible employee at the same percentage you contribute for yourself, so hiring turns a cheap personal plan into a payroll cost.

The two plans, side by side

| :--- | :--- | :--- | :--- |

| Overall defined-contribution limit | $70,000 for 2025; $72,000 for 2026, including both buckets | $70,000 for 2025; $72,000 for 2026, employer bucket only | IRS Publication 560 (2025), "What's New" |

| Funding deadline | Elective deferrals by December 31; employer contributions by the return due date including extensions | By the return due date including extensions | IRS Publication 560 (2025) |

The table hides one trap that deserves its own paragraph. For a self-employed owner, "25% of compensation" does not mean 25% of net profit. Compensation for a self-employed individual is net earnings from self-employment minus one-half of self-employment tax minus the employer's own contribution. Because the contribution reduces the compensation it is computed on, a 25% plan rate works out to a 20% effective rate on net adjusted income. The derivation is:

\text{Employer Contribution} = 0.25 \times (\text{Net Adjusted Income} - \text{Employer Contribution})

\text{Employer Contribution} = \frac{0.25}{1.25} \times \text{Net Adjusted Income} = 0.20 \times \text{Net Adjusted Income}

Any calculator or advisor quote that applies 25% straight to net profit overstates a self-employed owner's employer contribution by a quarter. That overstatement is the most common error in Solo 401(k) and SEP IRA planning, and it is why the worked examples below start from net adjusted income, not from gross profit.

Worked math: the same owner on both plans

Take a sole proprietor with $120,000 of net earnings from self-employment in 2025. Self-employment tax is computed on 92.35% of net earnings, so the taxable base is $110,820, the tax at 15.3% is $16,955, and one-half of that tax is $8,478. Net adjusted income is therefore $111,522. The employer contribution at the 20% effective rate is:

\text{Employer Contribution} = 0.20 \times \$111,522 = \$22,304

On a SEP IRA, $22,304 is the entire 2025 contribution. On a Solo 401(k), the owner adds the $23,500 elective deferral on top:

\text{Solo 401(k) Total} = \$23,500 + \$22,304 = \$45,804

\text{SEP IRA Total} = \$22,304

The Solo 401(k) shelters $23,500 more at the same income, because the deferral bucket is pure addition until the overall ceiling binds. At a 22% marginal rate, that extra $23,500 of deduction is worth about $5,170 of federal tax in the year, before state tax and before any effect on the qualified business income deduction, which is computed after the retirement deduction and therefore shrinks when the deduction grows.

Now take the same owner at $300,000 of net earnings in 2025. The self-employment tax base is $277,050, and because the Social Security wage base caps the 12.4% portion, the tax is about $29,871, so one-half is $14,935 and net adjusted income is $285,065. The employer contribution at 20% is $57,013. The Solo 401(k) total before the ceiling is $23,500 plus $57,013, or $80,513, which exceeds the $70,000 overall limit for 2025, so the Solo 401(k) contribution is capped at $70,000. The SEP IRA contribution is $57,013, uncapped. The gap narrows to $12,987, and it narrows further as income rises, because the SEP IRA keeps climbing toward the same ceiling while the Solo 401(k) is already parked at it.

An owner age 50 or over adds a $7,500 catch-up for 2025 or $8,000 for 2026 to the deferral bucket, and an owner who attains age 60, 61, 62, or 63 in the year may add up to $11,250 instead, if the plan permits it. The SEP IRA has no catch-up bucket at any age, so the age advantage belongs entirely to the Solo 401(k).

Scenario: the hire that breaks the plan

Consider a founder who opens a Solo 401(k) in January, defers the full $23,500 during the year, and hires a full-time employee in September. The Solo 401(k) was a one-participant plan when it was established, and it does not stay one once an eligible employee joins. The founder now faces a plan amendment, a different plan document, and nondiscrimination testing that a one-participant plan never needed. The cost of unwinding that mistake dwarfs the tax saved by the deferral.

The SEP IRA handles the same hire differently. Under the IRS SEP eligibility rules, an eligible employee is one who has reached age 21, has worked for the employer in at least 3 of the last 5 years, and has received at least the SEP minimum compensation amount. An employer may use less restrictive requirements, but not more restrictive ones. If the founder contributes 20% of net adjusted income for herself, she must contribute the same percentage of compensation for every eligible employee. A single eligible employee earning $60,000 costs the founder $12,000 of employer contributions at a 20% rate, on top of her own. That is the honest price of the SEP IRA's simplicity: it treats everyone alike, and alike includes the payroll.

!IRS SEP plan page: an eligible employee has reached age 21, has worked for the employer in at least 3 of the last 5 years, and has received at least the SEP minimum compensation amount

Entity note for the owner choosing a structure first: a single-member LLC files as a sole proprietorship unless it elects otherwise, an S-Corp pays its owner-employee through W-2 wages subject to FICA, and a C-Corp follows the same qualified-plan rules with its own payroll. Every employer plan needs an EIN on its adoption agreement, the self-employment tax itself is the SECA tax rather than FICA withholding, and a CPA should confirm which wage base applies before funding, because the S-Corp wage figure and the sole-proprietor net-income figure produce different employer contributions from the same business profit.

Operator boundaries: when each plan fights you

The Solo 401(k) fights you on administration. It needs a plan document, it needs the December 31 establishment deadline respected even when cash is tight at year-end, and it needs a Form 5500-EZ once plan assets exceed $250,000 at the end of a plan year. Ignoring the filing because the plan is "just theirs" creates a late-filing penalty problem unrelated to how much was saved.

The SEP IRA fights you on control. There is no deferral bucket to fill in a low year, no loan feature to borrow against in a cash crunch, and no way to contribute for yourself without contributing for eligible employees at the same rate. Its deadline generosity is real: a founder who discovers in March that last year was a strong year can still establish and fund a SEP IRA for that year by the return due date including extensions. A founder who discovers the same thing in March and has no Solo 401(k) established by the prior December 31 cannot retroactively create one for that year. The SEP IRA is the plan for founders who decide late; the Solo 401(k) is the plan for founders who decide on time.

> [!WARNING]

> Do not fund either plan on a gross-profit percentage. Applying 25% to net profit instead of the 20% effective rate on net adjusted income overstates the employer contribution, and an excess contribution to a SEP IRA or a qualified plan triggers correction procedures, excise tax exposure, and amended reporting. Run the worksheet in Publication 560, or have your CPA run it, before the money moves. The same warning applies in reverse: do not let a provider's marketing figure replace the worksheet, because the provider does not sign your return.

Execution checklist

[x] Step 1: Confirm one-participant status. List every worker, including part-time staff and a spouse on payroll, and test each against the plan's eligibility rules before choosing a Solo 401(k). If anyone other than you and your spouse is eligible, price the SEP IRA coverage cost or choose a different plan with your CPA.

[x] Step 2: Compute net adjusted income. Start from net earnings from self-employment, subtract one-half of self-employment tax, and apply the 20% effective employer rate for a 25% plan. Never apply 25% to gross profit.

[x] Step 3: Fill the deferral bucket first. If you choose a Solo 401(k), set the elective deferral election before December 31 and fund it during the year; the employer contribution can wait until the return due date including extensions.

[x] Step 4: Check the ceiling before funding. Add deferral, catch-up, and employer contribution, and cap the total at $70,000 for 2025 or $72,000 for 2026. If you are age 60 to 63, confirm the plan permits the $11,250 catch-up before relying on it.

[x] Step 5: Calendar the filings. Track plan assets against the $250,000 Form 5500-EZ threshold for a Solo 401(k), and keep the SEP IRA funding proof with the return it belongs to, not the year the cash moved.

For the payroll mechanics that sit underneath the self-employment tax figures in this guide, see our quarterly payroll tax filing guide, and for the deduction that shrinks when a retirement contribution grows, see our qualified business income deduction guide. Before funding, run the final totals through the self-employed tax estimator with the retirement deduction included, not added as an afterthought.

> [!TIP]

> If you are torn between the two plans, open the Solo 401(k) by December 31 and decide the funding split later. Establishing the plan preserves the deferral bucket, and the employer contribution can still be funded by the return due date including extensions. The reverse is not true: a SEP IRA opened in March cannot manufacture a prior-year deferral bucket that never existed.

> [!FOUNDER]

> "Founders treat retirement plans as a December problem, and December is when the better plan is already closed to them. The Solo 401(k) rewards the founder who decides in January and punishes the one who decides in March. If you will not decide in January, take the SEP IRA honestly and stop pretending the deferral bucket was ever yours."

> — Enow A. Jovial, Founder & Chief Executive Officer