Solo 401k vs SEP IRA: 2026 Limits and Which to Choose

Quick answer: In the Solo 401k vs SEP IRA decision, the Solo 401k usually lets self-employed people save more at low and middle incomes, because you contribute as both employee ($24,500 in 2026) and employer. The SEP IRA is simpler, with no annual filing and a later setup deadline, but it only allows about 20% of net self-employment earnings.

If you are self-employed in the US, you do not have an employer 401k, but you can set up your own retirement plan and deduct the contributions. The two most popular choices are the Solo 401k (also called an individual or one-participant 401k) and the SEP IRA. Both share the same $72,000 overall cap for 2026, but they reach it differently. This guide compares the 2026 contribution limits, works through examples at different incomes, and explains which self-employed retirement plan suits which situation. It is general information only; check your numbers with a qualified tax adviser or plan provider.

2026 contribution limits at a glance

The IRS announced the 2026 retirement plan limits in Notice 2025-67. The figures most relevant to self-employed people are below. Confirm them on IRS.gov before you contribute, as you should with any tax figure.

Limit (2026)	Solo 401k	SEP IRA
Employee deferral	$24,500	Not available
Employer contribution	Up to 25% of compensation (about 20% of net SE earnings for sole proprietors)	Up to 25% of compensation (about 20% of net SE earnings for sole proprietors)
Overall cap (excluding catch-up)	$72,000	$72,000
Catch-up, age 50 and over	$8,000	None
Catch-up, ages 60 to 63 (if plan allows)	$11,250 instead of $8,000	None
Compensation counted up to	$360,000	$360,000

The employee deferral limit is per person, not per plan. If you also have a day job with a 401k, your deferrals across both plans share the single $24,500 limit. Employer contributions to your Solo 401k are separate.

How self-employed contributions are calculated

For a sole proprietor or single-member LLC taxed as a sole proprietorship, compensation is not simply your profit. You start from net profit on Schedule C, subtract the deductible half of your self-employment tax, and then apply the contribution rate. Because the contribution itself reduces your compensation, 25% of compensation works out to 20% of net earnings after the self-employment tax deduction.

1. Calculate net self-employment earnings: net profit multiplied by 92.35%.
2. Calculate self-employment tax: 15.3% of that figure (the Social Security part stops at the annual wage base).
3. Subtract half of the self-employment tax from your net profit.
4. Multiply the result by 20%. This is your maximum employer contribution in either plan.

If you run an S corporation instead, the calculation is based on your W-2 wages from the company, not your profit, and the employer contribution is 25% of those wages. Our guide to S corp vs LLC explains the structures.

Worked example: Solo 401k vs SEP IRA at $100,000 profit

Jordan is a 42-year-old freelance developer with $100,000 net profit in 2026.

• Net SE earnings: $100,000 x 92.35% = $92,350
• Self-employment tax: $92,350 x 15.3% = about $14,130
• Half of SE tax: about $7,065
• Adjusted earnings: $100,000 - $7,065 = $92,935
• Employer contribution at 20%: about $18,587

Jordan, $100,000 profit	SEP IRA	Solo 401k
Employee deferral	$0	$24,500
Employer contribution	$18,587	$18,587
Total (age 42)	$18,587	$43,087
Total if Jordan were 55	$18,587	$51,087

At this income the Solo 401k allows more than twice as much. The difference is entirely the employee deferral, plus catch-up for older savers.

Example at $60,000 profit

With $60,000 net profit, half of self-employment tax is about $4,239, leaving about $55,761. The SEP maximum is 20% of that, about $11,152. A Solo 401k allows the same $11,152 plus up to $24,500 in deferrals, about $35,652 in total, which is more than half of profit. Few people can save that much, but the higher ceiling gives flexibility in a good year.

At high incomes the gap closes

As profit rises, the 20% employer contribution grows until both plans hit the $72,000 cap. A high earner who can reach the cap through the employer contribution alone gains less from the Solo 401k, apart from catch-up contributions and the Roth option. For most freelancers and small business owners, though, incomes sit in the range where the Solo 401k's deferral makes a real difference.

Beyond the limits: other differences that matter

Feature	Solo 401k	SEP IRA
Who can use it	Owner and spouse only, no other employees	Any business size; eligible employees must get the same percentage
Roth contributions	Often available for deferrals	Allowed by law since SECURE 2.0, but provider support varies
Loans	Plan may allow loans	No loans
Annual filing	Form 5500-EZ once assets exceed $250,000	None
Setup deadline	Generally by the tax return due date for employer contributions; deferral rules vary	Tax return due date, including extensions
Paperwork	Plan document, more admin	Simple form, minimal admin
Backdoor Roth IRA impact	No effect	SEP balance counts in the pro-rata rule

The last row matters for higher earners. If you do a backdoor Roth IRA conversion, any pre-tax SEP IRA balance is included in the pro-rata calculation and can make part of the conversion taxable. Solo 401k balances are not counted, which is one reason some people roll SEP money into a Solo 401k.

If your spouse works in the business

A spouse who genuinely works in the business and is paid for that work can also join a Solo 401k without turning it into a plan with employees. Each spouse then has their own $24,500 deferral limit and their own employer contribution, based on their own compensation, which can roughly double what a household saves through the business. In a SEP, a paid spouse simply receives the same percentage of pay as you. Paying a spouse has payroll, tax and record-keeping consequences of its own, so this is a conversation to have with an accountant before you set it up, not an add-on at year-end.

Deadlines and timing

Timing is where the SEP IRA shines. You can open and fund a SEP for 2026 as late as your 2026 tax return due date, including extensions. If you finish your books in March 2027 and find a strong year, you can still make a deductible contribution.

The Solo 401k used to require setup by December 31. The SECURE Act allowed new plans to be established by the return due date for employer contributions, and SECURE 2.0 added some flexibility for a sole proprietor's first-year deferrals. Providers handle these rules differently, so if you want to make employee deferrals for 2026, the safest plan is to open the account before year-end and confirm the deadline with your provider.

Whichever plan you choose, contributions do not reduce self-employment tax, but they do reduce income tax. Plan them alongside your quarterly estimated tax payments so you are not short of cash in April.

Which self-employed retirement plan should you choose?

Choose a Solo 401k if:

• You have no employees other than a spouse.
• You want to save more than about 20% of your net earnings.
• You are 50 or older and want catch-up contributions.
• You want Roth contributions or the option of a plan loan.
• You do, or may do, a backdoor Roth IRA.

Choose a SEP IRA if:

• You want the simplest possible setup and no annual filings.
• You are deciding after year-end and need the later deadline.
• Your income is high enough that 20% of earnings already reaches the amount you want to save.
• You have or plan to hire employees and are comfortable contributing for them too.

Many people use both over time: a SEP in the first years of freelancing when simplicity matters, then a Solo 401k once income and savings goals grow. Contributions are also part of a wider tax picture, alongside your self-employed tax deductions and the choice between an LLC and a sole proprietorship.

How to open either plan

Whichever side of the Solo 401k vs SEP IRA question you land on, setup is mostly online and takes less time than people expect.

1. Pick a provider. Most large brokerages offer both plans. Compare account fees, investment choices, whether a Roth option is available, and whether the Solo 401k allows loans or rollovers in.
2. Get an EIN if needed. Many Solo 401k providers ask for an Employer Identification Number rather than your Social Security number. Our guide on how to get an EIN explains the free IRS process.
3. Sign the plan paperwork. A SEP usually uses the short IRS model form (Form 5305-SEP) or the provider's prototype. A Solo 401k uses a plan document and adoption agreement from the provider.
4. Open the account and link your business bank account. Contributions should come from business funds so the record is clear.
5. Make and label contributions. For a Solo 401k, keep employee deferrals and employer contributions separate, and note the tax year each one is for.
6. Record the deduction. Sole proprietors claim contributions for themselves on Form 1040 Schedule 1, not on Schedule C. Your tax software or preparer will ask for the amounts.

Common mistakes to avoid

• Using gross revenue instead of net profit. The 20% calculation starts from profit after expenses, then subtracts half of self-employment tax. Using invoiced revenue overstates the limit.
• Exceeding the deferral limit with a day job. The $24,500 is shared across every 401k you contribute to as an employee.
• Missing the Solo 401k deadline for deferrals. If your provider requires the plan to exist by December 31, a January start may limit you to employer contributions for 2026.
• Forgetting employees. Hiring an eligible employee can disqualify a Solo 401k or require equal SEP contributions for them.
• Skipping Form 5500-EZ. Once Solo 401k assets pass $250,000, an annual filing is generally due.
• Not saving cash for the contribution. Decide your target early and set money aside from each client payment.

The Solo 401k vs SEP IRA choice is not permanent. You can usually close a SEP and open a Solo 401k later, or roll balances between plans, subject to provider and IRS rules.

Keep clean records

Both plans depend on an accurate figure for net profit, which depends on clean books. Invoice every job, record every payment, and keep business and personal money separate. A dedicated business bank account for freelancers makes the year-end calculation far easier. Contributions to either plan should come from business income you can document.

Conclusion

For most self-employed people weighing Solo 401k vs SEP IRA in 2026, the Solo 401k offers the higher ceiling at ordinary incomes, thanks to the $24,500 employee deferral and catch-up contributions, while the SEP IRA wins on simplicity and its late deadline. Both share the $72,000 overall cap. Run your own numbers using your Schedule C profit, confirm the limits on IRS.gov, and talk to a qualified tax adviser before you commit. To keep your income records clean from the first invoice, use the free US invoice generator or the main invoice generator, and explore more in our freelancing guides.