Solo 401(k) or SEP IRA: Picking the Right Plan for a Single-Owner Business

Figures reflect rules in effect as of October 2026.

For most one-person businesses, a solo 401(k) allows more than a SEP IRA at the same income. Both plans allow the same employer contribution; the solo 401(k) adds an employee deferral on top. A SEP IRA is simpler and can is simpler to run, and it matches the solo 401(k) only when profits are high.

If you work for yourself, the plan you choose decides how much of your income you can shelter, whether you can save as Roth, and how much paperwork comes with it. For a business with no employees, the choice is usually between these two.

Below are the 2026 limits, two worked examples, and the rule changes since 2023 that affect the choice.

Who can use each plan?

• Both need earned income from the business: net earnings from self-employment, or W-2 wages from your own corporation. Investment income doesn’t count.¹
• A solo 401(k) is an ordinary 401(k) that covers only the owner, or the owner and spouse. It has no other employees.²
• A SEP covers employees too. For 2026, an employee who is 21 or older, has worked for you in three of the last five years and earned at least $800 from you must be included, under the same written formula you use for yourself.¹

How much can I contribute in 2026?

Both plans allow an employer contribution of up to 25% of compensation. A solo 401(k) also lets you defer as an employee: for 2026, up to $24,500, plus $8,000 at age 50 or older, or $11,250 instead of $8,000 in the years you turn 60 through 63.³ The total can’t exceed $72,000, not counting catch-ups, or 100% of compensation if less, and no more than $360,000 of compensation counts.⁴˒⁵

Why 20% and not 25%?

For a sole proprietor or partner, compensation is net earnings from self-employment after subtracting half of the self-employment tax and the contribution itself.² Because the contribution shrinks the base it is figured on, a 25% plan rate works out to 20% of net earnings, which Publication 560 calls the reduced rate.¹

Self-employment tax is 15.3% of 92.35% of net profit, and half of it is deductible.⁶ The 12.4% Social Security part stops at $184,500 of earnings for 2026.⁷ Below that level, the employer contribution comes to about 18.6% of Schedule C profit.

An S corporation owner uses W-2 salary instead. The employer contribution is up to 25% of salary, as the plan defines compensation, and the deferral comes out of that salary.² My post on S corporations and reasonable compensation covers how the salary is set.

How do the numbers compare?

Two hypothetical examples, using the Publication 560 worksheet with the 2026 limits.¹ Each assumes a sole proprietor under 50 with no other wages, a 25% plan rate and pre-tax contributions.

At these profit levels the employer contribution is identical in both plans. The solo 401(k)’s advantage is the $24,500 deferral, which matters most at moderate profits: in Example B it more than doubles the total. At 50 or older, the solo 401(k) adds an $8,000 catch-up that a SEP can’t.

The gap narrows as profit rises. On the same hypothetical assumptions, the solo 401(k) reaches the $72,000 limit at about $252,000 of profit, and the SEP alone reaches it at about $376,000. Above that, both allow $72,000, and only the solo 401(k) adds catch-ups.

At very low profits the worksheet caps the solo 401(k)’s employer contribution at half of net earnings after the deferral; with a full deferral that limit starts to bind below about $44,000 of profit.¹

Can I save as Roth?

In a solo 401(k), deferrals can go to a Roth account if the plan has one. Since the SECURE 2.0 Act, a plan may also let you designate employer contributions as Roth; they are then taxable to you in the year they are allocated to your account.⁸

SEP IRAs are no longer pre-tax only. For tax years after 2022, a SEP plan may let you direct contributions to a Roth SEP IRA, where the provider supports it.¹

One new rule applies to S corporation owners. If your W-2 wages from the company were more than $150,000 in 2025, your 2026 catch-ups must be Roth.⁴˒⁹ The rule is based on wages, so a sole proprietor’s self-employment income doesn’t trigger it.¹⁰

What are the deadlines?

• New solo 401(k). A sole proprietor can adopt a new solo 401(k) after year-end, up to the return due date including extensions, and treat it as in place for the prior year; first-year employee deferrals count only if paid in by the unextended due date.¹¹˒¹
• Employer contributions can be made up to the tax return due date, including extensions.¹
• SEP IRA. It can be set up and funded as late as the return due date, including extensions.¹
• Form 5500-EZ. Once a solo 401(k)’s assets, combined with any other one-participant plans you keep, exceed $250,000 at year-end, the plan files Form 5500-EZ. It is due the last day of the seventh month after the plan year ends (July 31 for a calendar year), and Form 5558 gives a one-time extension of up to 2½ months. A late filing can cost $250 a day, up to $150,000 a plan year, and a return is also due for the plan’s final year.¹²

What else separates them?

• Loans. A 401(k) may offer loans. A SEP IRA can’t, because a loan from an IRA is a prohibited transaction.¹³
• Backdoor Roth. A SEP IRA counts as a traditional IRA in the pro rata calculation for a backdoor Roth conversion, which can make most of the conversion taxable. A solo 401(k) balance doesn’t count.¹⁴
• A day job’s 401(k). The $24,500 deferral limit is per person, across every plan you join. The $72,000 limit applies separately to plans of unrelated employers, so your solo 401(k) can still take employer contributions.²˒⁵
• The 199A deduction. Deductible contributions for yourself reduce qualified business income, which trims the Section 199A pass-through deduction.¹⁵
• Hiring. Once an employee meets the plan’s eligibility rules, the solo 401(k) must cover them and, unless it is a safe harbor or other exempt design, becomes subject to testing.² For plan years from 2025, a 401(k) can make part-time staff wait no longer than two consecutive years of at least 500 hours each.¹ A SEP must include eligible employees under its formula.

Which should I choose?

• A solo 401(k) usually fits when you have no employees, want the most room at moderate profits, want Roth deferrals or catch-ups, or plan backdoor Roth conversions.
• A SEP IRA usually fits when you want the least paperwork, are deciding after the unextended filing deadline, or expect to hire soon.

This is a starting point, not a decision on its own. Cash flow, hiring plans and the rest of your return can change the answer.

If a solo 401(k) allows after-tax contributions, it can also hold a mega-backdoor Roth; for the pre-tax or Roth choice itself, see Roth vs. traditional. Both fit within how I approach retirement planning.

The Bottom Line

A solo 401(k) and a SEP IRA allow the same employer contribution, figured the same way. The solo 401(k) adds a $24,500 deferral and catch-ups for 2026, which is why it usually allows more until profits are high. The SEP is simpler to run. Choose with your profit, your hiring plans and any backdoor Roth plans in view.

If you would like to run the numbers for your own business, book a complimentary 15-minute call.