Solo 401(k) vs. SEP IRA: Which Retirement Plan Lets a Freelancer Save More?
On the same income, one plan can shelter far more than the other. Here are the 2026 limits, the real formulas, and a side-by-side calculation at four income levels.
Freelancers do not get an employer match, a payroll deduction or a retirement plan handed to them. What they do get is more ways to save than most employees, if they know where to look. Two accounts dominate: the SEP IRA and the Solo 401(k). They sound alike and behave very differently, and the difference can be tens of thousands of dollars of tax-advantaged room.
Key takeaways
- Both plans are for self-employed people. The Solo 401(k) lets you contribute as both employee and employer. The SEP IRA allows only the employer-style contribution.
- For 2026 the employee deferral limit is $24,500, and total contributions for the year are capped at $72,000 (plus catch-up amounts for older savers).
- At lower and middle profits, the Solo 401(k) usually allows much more than a SEP, because the employee deferral does not depend on how much you earn, only on your compensation.
- A SEP is simpler and works well at high profits, but it becomes expensive the moment you hire staff.
- Retirement contributions lower your income tax, but not your self-employment tax.
What each plan is
A 401(k) for a business owner with no employees, or the owner and their spouse. The owner contributes in two roles: as the employee, by deferring part of their earnings, and as the employer, by adding a profit-sharing contribution.
A Simplified Employee Pension: an IRA-based plan where the business makes contributions to each eligible person's IRA. There is no employee deferral in the standard version. It is set up with a short IRS form (5305-SEP) or a provider's document.
The IRS confirms that a one-participant 401(k) covers a business owner with no employees, or that person and their spouse, and that the owner can contribute both as an employee and as an employer.
The problem
Retirement saving is one of the largest levers a freelancer has, both for the future and for this year's tax bill. But the accounts are described in dense IRS language, providers naturally promote their own products, and the two main options look nearly the same in a brochure. It is easy to choose the one your bank offers first without comparing.
Why it is harder than it looks
- Self-employed contribution math is odd. The IRS calculates your "compensation" after subtracting half of your self-employment tax and your own plan contribution, so a naive "25% of profit" is wrong.
- Limits change every year. Numbers copied from a two-year-old article are usually out of date.
- The plans behave differently as you grow. A choice that suits a solo freelancer can hurt when you hire someone.
- Deadlines differ. When you can open the plan and when you can contribute are not the same.
The gap in most advice
Most guides say both plans allow "up to 25% of compensation, capped at $72,000" and stop there. That sentence is true of the employer contribution only. The Solo 401(k) adds an employee deferral of up to $24,500 on top of it (in 2026), which is a fixed dollar amount, not a percentage. For a freelancer earning $60,000 or $80,000, that extra layer is the difference between saving about $11,000 and saving about $35,000.
Also, for self-employed people the "25%" is effectively 20% of net earnings after the deduction for half of self-employment tax, because compensation is reduced by the contribution itself.
The 2026 numbers
| 2026 limit | Amount |
|---|---|
| Employee deferral (Solo 401(k)) | $24,500 |
| Catch-up, age 50 and over | $8,000 |
| Catch-up, ages 60 to 63 | $11,250 |
| Total contributions, Solo 401(k) or SEP (before catch-up) | lesser of 100% of compensation or $72,000 (SEP: lesser of 25% of compensation or $72,000) |
| Compensation that can be counted | $360,000 |
Sources: IRS announcement of 2026 retirement limits (Notice 2025-67) and IRS SEP contribution limits.
How the two plans compare
| Solo 401(k) | SEP IRA | |
|---|---|---|
| Who can use it | Owner with no employees (spouse may participate) | Any business, including ones with employees |
| Contribution types | Employee deferral plus employer contribution | Employer contribution only |
| Contributions at lower profit | High | Low |
| Catch-up contributions | Yes | Generally no in a standard SEP |
| Roth option | Possible if the plan offers it | Rarely offered by providers |
| Loans | Possible if the plan allows | Not available |
| Setup effort | More paperwork | Very light |
| Annual filing | Form 5500-EZ once plan assets reach $250,000 | Generally none |
| If you hire staff | Must cover eligible employees or be restructured | Must contribute the same percentage for eligible employees |
The plot: how much each plan allows at four profit levels
This chart uses the IRS formulas and 2026 limits. Assumptions: no employees, no other retirement plan, self-employment tax calculated on profit under the Social Security cap, and no catch-up contributions. Compensation is net profit minus half of self-employment tax. The SEP figure is 20% of that; the Solo 401(k) figure is $24,500 plus 20%, limited to 100% of compensation.
Calculated from IRS rules and 2026 limits; rounded to the nearest dollar. At $30,000 the Solo 401(k) figure equals your full compensation, which few people would actually defer. These are maximums, not recommendations.
At $80,000 of profit, the SEP allows about $14,870 while the Solo 401(k) allows about $39,370, roughly 2.6 times as much. As profit grows, the gap narrows in proportion, because the employee deferral becomes a smaller share. That is why the Solo 401(k) is the stronger default for most solo freelancers, and why a SEP is a reasonable, simpler choice at higher profit when you would not use the full deferral anyway.
Here is the working for the $80,000 case:
| Step | Calculation | Result |
|---|---|---|
| Self-employment tax | $80,000 × 92.35% × 15.3% | $11,303.64 |
| Half of SE tax | $11,303.64 ÷ 2 | $5,651.82 |
| Compensation | $80,000 − $5,651.82 | $74,348.18 |
| SEP contribution (20%) | $74,348.18 × 20% | $14,869.64 |
| Solo 401(k) | $24,500 + $14,869.64 | $39,369.64 |
A strategy for choosing
Use these questions in order.
- Will you hire employees? If yes soon, a SEP obliges you to contribute for them at the same percentage, so plan for that cost or choose a different structure.
- Do you want to save more than about 20% of your profit? If yes, a Solo 401(k) can allow more at lower profits, because the employee deferral is a fixed dollar amount.
- How much paperwork will you tolerate? A SEP takes minutes. A Solo 401(k) takes an application and, above $250,000 of assets, an annual IRS form.
- Do you want Roth flexibility or a loan feature? Check whether the provider offers them.
- Are you likely to use the full amount? If you can only afford to save 10% of profit, both plans work and simplicity may win.
Step-by-step solution
- Estimate this year's net profit and work out your compensation using the table above.
- Compute both maximums so you know the ceiling for each plan.
- Decide on a realistic contribution, based on your cash flow and tax reserve, not on the maximum.
- Choose a provider with low fees, a wide choice of low-cost index funds and, for a Solo 401(k), a plan document that supports the features you want.
- Open the plan. A SEP can generally be set up as late as your tax filing deadline, including extensions. Solo 401(k) adoption deadlines can be earlier, so open it before year-end if you can.
- Contribute, noting that employer-type contributions for either plan can generally be made up to your filing deadline, including extensions.
- Report correctly. Keep the plan documents and the year-end statement, and give them to your tax preparer.
- Review annually, because the limits change every year.
Common mistakes
- Using "25% of profit" instead of the self-employed formula
- Opening a SEP, then hiring someone and being surprised by the cost of covering them
- Missing the annual Form 5500-EZ once plan assets reach $250,000
- Contributing more than the annual limit
- Choosing a provider with high fees or expensive funds
- Forgetting that deadlines for opening and contributing differ
Frequently asked questions
Can I have a Solo 401(k) and a SEP at the same time?
Generally, contributions to both plans share the same overall limits, so having both adds complexity without adding extra room. Most people choose one.
Can my spouse participate in a Solo 401(k)?
Yes. The IRS says the plan can cover the owner and their spouse, and the spouse must have earned income from the business to contribute.
Is a Solo 401(k) allowed if I have a day job with a 401(k)?
Yes, but the employee deferral limit is shared across all your 401(k) plans. Your employer contributions from the Solo plan are separate.
Which is better if my income is very high?
At high profits the two plans converge because the total cap and the compensation limit bind. A SEP can then be the simpler choice.
Do I get a match?
No, you are the employer. Your employer contribution is a profit-sharing amount you choose each year, up to the limit.
Sources and further reading
- IRS: One-participant 401(k) plans — who qualifies, contribution roles, Form 5500-EZ threshold
- IRS: 2026 retirement plan limits (401(k) limit rises to $24,500)
- IRS: SEP contribution limits — 25% or $72,000 for 2026; $360,000 compensation limit
- IRS Publication 560: Retirement plans for small business — self-employed contribution worksheets
Educational content, not tax or investment advice. Limits are the 2026 IRS amounts; check the IRS and your plan provider for the latest rules, and consider speaking to a tax professional before choosing.
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