Solo 401(k) vs SEP IRA: which shelters more self-employed income?
Short answer
A Solo 401(k) shelters more at low and mid incomes because you contribute both an employee deferral and an employer share. A SEP IRA only allows the employer share, so it needs roughly $200,000 of net self-employment profit to match the same dollar total.
Option A
Solo 401(k)
One-participant 401(k) for an owner-only business, allowing both employee deferrals and employer profit sharing.
Strengths
- Employee deferral of about $24,500 regardless of profit level
- Employer profit sharing of up to 20% of net self-employment income on top
- Roth deferral option available inside the same plan
- Plan loans are permitted up to 50% of balance or $50,000
Trade-offs
- Requires a plan document and, above $250,000 in assets, a Form 5500-EZ
- Must be established before year-end to make deferrals for that year
- Not usable once you have non-spouse full-time employees
Option B
SEP IRA
Employer-only retirement plan funded as a percentage of compensation, opened at any brokerage in minutes.
Strengths
- No plan document, no annual filing, essentially zero admin
- Can be opened and funded up to the tax filing deadline including extensions
- Same 25%-of-compensation ceiling that a corporation would use
- Easy to skip entirely in a bad year
Trade-offs
- No employee deferral, so low-profit years shelter very little
- Traditional pre-tax only at most custodians — no Roth bucket
- Pro-rata rule complicates backdoor Roth conversions
- Must cover eligible employees at the same percentage
Head-to-head
| Metric | Solo 401(k) | SEP IRA |
|---|---|---|
| Contribution at $50k net profitA | ~$34,000 | ~$9,300 |
| Contribution at $100k net profitA | ~$43,100 | ~$18,600 |
| Contribution at $200k net profitA | ~$61,700 | ~$37,200 |
| Roth optionA | Yes, on deferrals | Rarely offered |
| Annual admin burdenB | Plan doc + 5500-EZ over $250k | None |
| Deadline to openB | December 31 | Tax filing deadline |
| Blocks backdoor Roth?A | No | Yes (pro-rata) |
Badge marks which option wins that row: A = Solo 401(k), B = SEP IRA.
The SEP only catches up above roughly $200,000 of net profit — and even then it never wins, it just ties.
Both plans share the same overall annual additions ceiling, so at very high profit the two land in the same place. The difference is everything below that line. The Solo 401(k) front-loads a flat employee deferral that does not depend on profit, which is exactly what a $40,000–$120,000 freelance year needs. The SEP's contribution is a straight percentage, so a soft year shelters almost nothing. The real reason to pick the SEP is timing: if it is already March and you never opened a plan last year, the SEP is the only door still open.
Worked example: $100,000 of net self-employment profit, single owner, no employees
- Net profit = $100,000
- Deductible half of self-employment tax = about $7,065
- Net earnings base = $100,000 − $7,065 = $92,935
- SEP: 20% of $92,935 = $18,587
- Solo 401(k) employee deferral = $24,500
- Solo 401(k) employer share = 20% of $92,935 = $18,587
- Solo 401(k) total = $24,500 + $18,587 = $43,087
At $100,000 of profit the Solo 401(k) shelters about $24,500 more — worth roughly $7,000 in federal tax at a 24% marginal rate, for maybe two hours of extra paperwork a year.
The verdict
Choose Solo 401(k)
Pick the Solo 401(k) if you are owner-only, plan ahead to December, and want Roth or loan flexibility.
Choose SEP IRA
Pick the SEP IRA if you are past year-end and still want a deduction, or your profit is high enough that the deferral no longer matters.
Or run both
Many freelancers open a SEP for the first filing season and roll into a Solo 401(k) the following year.
Frequently asked questions
Can I have both in the same year?
Technically yes, but the combined annual additions limit still applies to the pair, so there is rarely any benefit beyond a transition year.
What happens if I hire an employee?
A Solo 401(k) must convert to a standard 401(k) with testing, and a SEP must cover the eligible employee at the same percentage you take. Both get materially more expensive.
Do these reduce self-employment tax?
No. Retirement contributions reduce income tax, not the 15.3% self-employment tax. Only an S-corp election changes that side of the bill.
Methodology
Uses 2026 contribution limits, the standard 20%-of-net-earnings employer calculation for unincorporated owners, and the deductible half of self-employment tax. State tax treatment and catch-up contributions for those over 50 are excluded.
Run your own numbers
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Last updated 2026-08-13. Machine-readable version: /api/public/comparisons.json. Free to cite with attribution to RevenueLab.