Solo 401(k) vs. SEP IRA for Freelancers: 2026 Limits & Math

Sources: IRS 2026 retirement plan limits · IRS One-Participant 401(k) Plans · IRS SEP Plans · IRS Publication 560

Bottom line: for a self-employed person with no employees, a Solo 401(k) allows the same or a larger contribution than a SEP IRA at every income level — often three times larger below $100,000 of profit — and adds Roth, catch-up and loan options. Choose a SEP IRA when you want zero paperwork, are opening a plan after the Solo 401(k) deadline has passed, or plan to hire employees soon.

2026 Contribution Limits at a Glance

* "25% of compensation" in plan documents becomes an effective 20% for sole proprietors and single-member LLCs, because the contribution itself is subtracted from compensation. For S-corporation owners it is 25% of W-2 salary.

The Formula, Step by Step

For a sole proprietor or single-member LLC, "net earnings from self-employment" is:

Net SE earnings  = Schedule C net profit − ½ of SE tax
Employer part    = 20% × Net SE earnings          (both plans)
Employee part    = up to $24,500                  (Solo 401(k) only)
Solo 401(k) max  = lesser of (employee + employer), $72,000, or net SE earnings

Example — $60,000 net profit: SE tax is $8,478, so net SE earnings are $60,000 − $4,239 = $55,761. The employer part is 20% × $55,761 = $11,152. That's the entire SEP IRA limit. In a Solo 401(k) you add the $24,500 employee deferral for a total of $35,652.

Side-by-Side at Four Income Levels (2026, Under Age 50)

"Tax saved" is federal income tax for a single filer taking the standard deduction and QBI deduction; it assumes pre-tax (traditional) contributions and excludes state tax, which adds more savings in most states. The savings are smaller than contribution × tax bracket for two reasons: contributions don't reduce self-employment tax, and they reduce your QBI deduction (pre-tax contributions attributable to the business lower qualified business income). At the $40,000 level, the maximum Solo 401(k) contribution eliminates federal income tax entirely — more than that is no longer saving tax at all, so a Roth deferral would make more sense for part of it.

When a SEP IRA Is Still the Right Choice

• You're late. It's after your filing deadline for employee deferrals, or you're filing on extension and just now thinking about it. A SEP can be opened and funded until the extended deadline (October 15, 2027 for 2026 returns).
• Your profit is high enough that 20% alone reaches your goal. Above roughly $375,000 of profit, the employer contribution alone hits the $72,000 cap, and the SEP's simplicity wins.
• You'll hire employees. A Solo 401(k) is only for businesses with no employees other than the owner and spouse. Once you have eligible employees (including long-term part-timers under SECURE 2.0 rules) you need a regular 401(k), SIMPLE IRA or SEP covering them.
• You want no administration. A SEP IRA has no annual filing ever; a Solo 401(k) needs Form 5500-EZ once plan assets pass $250,000 — and late-filing penalties are steep.

Details That Trip People Up

You have a W-2 job with a 401(k) too

The $24,500 employee deferral limit is per person across all plans. If you defer $24,500 at your day job, you can't make employee deferrals to your Solo 401(k) — but you can still make the 20% employer contribution. In that case a Solo 401(k) and SEP give the same limit.

The backdoor Roth problem

If you do backdoor Roth IRA conversions, a SEP IRA balance counts toward the IRS pro-rata rule and can make most of the conversion taxable. A Solo 401(k) balance doesn't count. Many higher earners pick a Solo 401(k) for this reason alone.

Roth catch-up rule

Starting in 2026, people aged 50+ whose prior-year FICA wages from the plan sponsor exceeded $150,000 must make catch-up contributions as Roth. Sole proprietors have self-employment income, not FICA wages, so this rule generally doesn't apply to them — but it does apply to S-corporation owners paying themselves a salary above that level.

Deadlines for 2026 contributions

• SEP IRA: open and fund by your tax deadline including extensions.
• Solo 401(k), existing plan: employee deferral elections should be made by December 31, 2026; the money can be deposited by the filing deadline for sole proprietors. Employer contributions by the deadline including extensions.
• Solo 401(k), new plan: sole proprietors can establish a plan after year-end and make first-year employee deferrals up to the original filing deadline (April 15, 2027), and employer contributions until the extended deadline.

S-corporation owners

If your business is taxed as an S-corp, contributions are based on your W-2 salary, not total profit: the employer part is 25% of salary. A low salary saves payroll tax but also limits your retirement contribution — see our S-corp break-even guide for the trade-off.

What About a SIMPLE IRA or a Regular IRA?

A SIMPLE IRA allows $17,000 of employee deferrals in 2026 (plus a 3% employer match) and is designed for small businesses with employees. For a solo freelancer, a Solo 401(k) allows more. A traditional or Roth IRA ($7,500 in 2026, plus $1,100 at age 50+) can be used in addition to either plan, though deducting a traditional IRA contribution phases out at higher incomes when you're covered by a workplace plan — which includes your own SEP or Solo 401(k).

How to Open a Solo 401(k)

1. Get an EIN for your business (free at IRS.gov — sole proprietors need one for the plan even if they use their SSN elsewhere).
2. Pick a provider. Fidelity, Schwab and E*Trade offer no-fee Solo 401(k)s with pre-tax and Roth deferrals; check whether loans and rollovers-in are supported if they matter to you.
3. Sign the plan adoption agreement before the deadline you're relying on.
4. Make your deferral election in writing, then deposit contributions and label them as employee or employer.
5. Deduct employee and employer contributions on Schedule 1 (line 16) of Form 1040 — not on Schedule C.

Want to see how a contribution changes your quarterly estimates? Try our freelancer tax calculator, then reduce the income-tax portion by your expected savings. For how much to set aside overall, see How Much to Set Aside for Taxes.

Limits from IRS announcements for 2026. Tax savings assume a single filer, traditional contributions, the $16,100 standard deduction and the 20% QBI deduction, and exclude state taxes. This is general information, not tax or investment advice.

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