Solo 401(k) or SEP IRA? Picking the right plan for a single-owner business in 2025

Solo 401(k) or SEP IRA? Picking the right plan for a single-owner business in 2025

Choosing a retirement plan should not feel like decoding the tax code. Below is a clear side-by-side look at Solo 401(k) and SEP IRA rules for 2025, followed by two real-world income examples. This will help you see which plan lets you save more while trimming this year’s tax bill.

2025 limits at a glance

	Solo 401(k)	SEP IRA
Employee contribution	up to $ 23,500 (plus $7,500 if age 50+)	N/A
Employer contribution	20 % of net self-employment income, so employee + employer can reach $ 70,000	25 % of compensation, capped at $ 70,000
Compensation counted	first $ 350,000 of earnings
Roth option	yes, on the employee part	no
Set-up deadline	plan must exist by 31 Dec	can open as late as your tax filing date plus extensions

Example 1

Independent graphic designer

Net Schedule C profit: $ 180,000

	Solo 401(k)	SEP IRA
Employee part	$ 23,500	–
Employer part	≈ $ 28,600*	$ 45,000
Total saved for 2025	$ 52,100	$ 45,000

*Solo 401(k) uses 20 % of net profit after the deduction for half of self-employment tax.

What we learn: At this profit level the Solo 401(k) pulls ahead because that extra employee slot stacks on top of the employer share.

Example 2

Wedding photographer

Net profit: $ 90,000

	Solo 401(k)	SEP IRA
Employee part	$ 23,500	–
Employer part	≈ $ 17,900	$ 22,500
Total saved for 2025	$ 41,400	$ 22,500

Here the Solo 401(k) nearly doubles the contribution space. For many owners in the $80 k–$120 k range that difference is the deciding factor.

Five quick questions before you choose

1. Will you add employees soon?

   A Solo 401(k) works only while you have no staff other than a spouse. A SEP can continue, but every eligible worker must get the same percentage you give yourself.

2. Do you want Roth dollars?

   The Solo lets you send the employee slice to Roth while keeping the employer slice pretax. A SEP cannot do that.

3. Is cash flow steady?

   A SEP lets you wait until tax time to decide the exact percentage. Solo employee dollars must be set aside by 31 Dec.

4. Are you age 50 or older?

   The extra $7,500 contribution is available only inside the Solo plan.

5. Comfort with paperwork

   Solo plans require a short Form 5500-EZ once assets pass $250 000. A SEP has no annual filing.

Practical rule of thumb

• Profit under roughly $170k and no employees on the horizon → Solo 401(k) usually gives the bigger deduction.

• Profit well above $200k or staff hiring is likely next year → SEP IRA may be simpler.

Need a closer look at your own numbers? Book a short call and we can run the math line by line.

For education only. Consult your tax professional before acting on any strategy.