Solo 401(k) vs SEP IRA for the Self-Employed: 2026 Numbers

You run a one-person business, you have heard that a solo 401(k) and a SEP IRA both top out at $72,000 in 2026, and you want to know which one to open before the year closes. The two plans share a ceiling; what separates them is how much profit it takes to reach it, which deadlines apply, and how much paperwork you sign up for. This article gives you the 2026 table by net profit, the deadline rules from Publication 560, and a five-question check that picks the plan.

This is general information, not licensed tax or financial advice. Before going independent I worked in finance, and I now run a one-person online business, but I am not licensed to advise on your return. The primary sources are the IRS pages on one-participant 401(k) plans and SEP plans; for your own numbers, run them past a tax professional.

What each plan is, in one paragraph each

A solo 401(k) is not a special product. The IRS calls it a one-participant 401(k) and describes it as an ordinary 401(k) plan that happens to cover a business owner with no employees, or the owner and a spouse. Because there is nobody else in the plan, the nondiscrimination testing that makes company 401(k)s expensive does not apply. You contribute twice: once as the employee, through elective deferrals, and once as the employer, through a nonelective contribution of up to 25% of compensation.

A SEP IRA is a traditional IRA that an employer funds. Only the employer contributes, the account is 100% vested from day one, any size of business can set one up, and there is no annual filing requirement for the employer. For a sole proprietor, “employer” and “employee” are the same person, which is why the SEP feels like the simple option: one contribution, one form, done.

The feature table

Limits collected from irs.gov on September 14, 2026.

Why 25% is really 20% for a sole proprietor

Every page that says “25% of compensation” is correct and misleading at the same time. For a W-2 owner of an S corporation, compensation is the salary on the W-2, and 25% means 25%. For a sole proprietor, the IRS defines compensation as net earnings from self-employment after deducting both one-half of self-employment tax and the contribution for yourself. The contribution reduces the base it is computed on, so a 25% plan rate becomes 20% of net earnings, which is the figure Publication 560’s rate table gives for a 25% plan.

Here is the chain on $100,000 of Schedule C net profit. Schedule SE multiplies profit by 92.35%, giving $92,350 of earnings subject to self-employment tax. The tax is 12.4% for Social Security up to the 2026 wage base of $184,500 plus 2.9% for Medicare, so $14,130. Half of that, $7,065, comes off the profit, leaving $92,935 of net earnings. Twenty percent of $92,935 is $18,587. That is the SEP maximum and the solo 401(k) employer maximum at $100,000 of profit, and it is not $25,000.

When I worked in finance the payroll department did this arithmetic and nobody saw it. Running a one-person business means you are the payroll department, and the first time you fill in the Publication 560 worksheet the 20% is the number that surprises people.

The 2026 numbers by income level

The table below runs the IRS method for a sole proprietor under 50 at nine profit levels. Net earnings equal Schedule C net profit minus half of self-employment tax; the SEP and employer maximum is 20% of net earnings; the solo 401(k) adds the $24,500 deferral; both are capped at $72,000, or $80,000 with the $8,000 catch-up. Computed September 14, 2026 from the 2026 limits.

Two crossover points fall out of the math. A sole proprietor under 50 hits the $72,000 solo 401(k) cap at roughly $252,500 of net profit. The SEP needs net earnings of $360,000 to get there, which is roughly $376,500 of net profit, and $360,000 is also the most compensation the IRS lets you count. Between those two points the SEP gap shrinks; below the first one it is exactly $24,500, or $32,500 if you are 50 or older.

Read the table from your own row. At $75,000 of profit the SEP lets you shelter $13,940 and the solo 401(k) lets you shelter $38,440; the SEP is not “almost as good,” it is a third. At $400,000 the two are identical and the SEP’s simplicity wins on its own. Notice also that self-employment tax barely moves after $200,000: the 12.4% Social Security piece stops at the $184,500 wage base, so only the 2.9% Medicare piece keeps climbing.

Neither plan changes that self-employment tax line. Contributions are deducted on Schedule 1 after Schedule SE has done its work, which is why the numbers in your quarterly estimated payments drop by the income-tax effect only. And because the contribution lives on Schedule 1 rather than Schedule C, it is not in the creator deduction map either; it sits above the line on its own.

Catch-up at 50, and who the 2026 Roth catch-up rule actually catches

At 50 the solo 401(k) adds an $8,000 catch-up deferral for 2026, and ages 60 through 63 get $11,250 instead. A SEP has no catch-up at all. For anyone over 50 the gap between the plans is therefore $32,500 below the cap, not $24,500.

Two of the ten pages ranking for this search tell you that, starting in 2026, participants who earned more than $150,000 must make catch-up contributions as Roth. The threshold is real: the IRS catch-up page says the requirement applies when prior-year wages with the plan sponsor exceeded $150,000 for 2026. What those pages leave out is who is exempt. The final regulations state that an individual who had no FICA wages from the employer sponsoring the plan in the preceding year, giving the example of a partner with only self-employment income, is not subject to the Roth catch-up requirement. A sole proprietor with no W-2 wages has no FICA wages, so the rule does not reach you. An S corporation owner paying themselves a W-2 salary over $150,000 is the person it catches. The regulations generally apply to taxable years beginning after December 31, 2026, with a reasonable good-faith standard before then, so a provider asking you to go Roth on the catch-up this year is being cautious, not wrong.

Deadlines: the part that decides it for late starters

The setup deadline is where most comparison pages are either vague or out of date, and it is the single fact that decides the question for anyone reading this in the spring.

Read together, the rows say this. If it is September 14, 2026 and you have no employees, both plans are fully open for tax year 2026. Open the solo 401(k) now and sign the deferral election before December 31, and you get both buckets. Wait until March 2027 and the sole-proprietor rule still lets you adopt the plan for 2026 by the April filing date, but the deferral bucket is closed, so a 2026 solo 401(k) opened in March behaves like a SEP for 2026. The SEP has no such trap: it can be opened and funded up to the extended due date.

The penalty row matters more than the filing row. The 5500-EZ is one page and it is due once a year, but forgetting it after your balance passes $250,000 is priced at $250 a day. A solo operator without an accountant should put the July 31 date in the calendar the same day the account is opened.

Roth, loans, and the paperwork, priced honestly

The Roth question is one-sided in practice. A 401(k) plan document can include a Roth contribution program, and Publication 560 describes designated Roth deferrals for qualified plans; a solo 401(k) with that feature lets you put the whole $24,500 in after tax. On the SEP side, Publication 560 also confirms that since the SECURE 2.0 Act an employer’s SEP may let contributions go into a Roth IRA, so the Roth SEP exists in law. What you have to check is whether the custodian you would use actually offers it; the IRS page for SEPs does not describe one. If you want Roth money at the $24,500 scale, the solo 401(k) is the plan that reliably delivers it.

Loans are also one-sided. A 401(k) plan may allow a participant loan capped at $50,000 or half the vested balance, whichever is smaller, repaid within five years with at least quarterly payments unless the loan buys a primary residence. IRA-based plans, and the IRS names SEPs specifically, cannot make loans; doing so is a prohibited transaction. Whether you would ever borrow from your own retirement money is a separate question; the option exists on one side only.

The paperwork is the SEP’s whole case. A SEP is adopted on Form 5305-SEP and carries no employer filing. A solo 401(k) needs a plan document, a deferral election, and, eventually, the 5500-EZ. For a one-person business the honest accounting is that the 401(k) costs maybe an hour at setup and thirty minutes a year once the balance is large. Against a $24,500 difference in room, that is not the deciding factor for most people; it is the deciding factor if you will only ever contribute a few thousand dollars a year, because then the SEP’s ceiling never binds and its simplicity is free.

If you hire, if you have a spouse, if you already have a SEP

Hiring ends the solo plan. The IRS is explicit that the one-participant treatment exists because there are no employees who could receive different benefits, and that once you hire, the plan has to cover eligible employees and pass testing. A SEP survives a hire, but it requires the same percentage of pay for every eligible employee, where eligible means age 21, work in three of the last five years, and 2026 pay of at least $800. If you expect to hire within a couple of years, price that in before you pick.

A spouse on payroll is the exception. A one-participant plan can cover the owner and their spouse, and the spouse gets their own $24,500 deferral plus an employer contribution on their own compensation. That doubles the household’s room without changing the plan type.

Already have a SEP? Nothing is lost. The IRS lists rollovers to other IRAs and qualified plans as a normal SEP-IRA withdrawal option, so the balance can move into a new solo 401(k). The one rule to know is that Form 5305-SEP cannot be used if you maintain any other qualified retirement plan, so the clean sequence is to stop SEP contributions, open the 401(k), and roll the SEP in, rather than running both.

Five questions that pick the plan

Answer these in order. The first “yes” that appears decides.

1. Do you have, or will you soon have, an employee other than your spouse? Yes: SEP now, and plan for a real 401(k) when you hire.
2. Is your 2026 net profit above about $252,500? Yes: both plans reach $72,000; the SEP is simpler and equal, unless question 4 applies.
3. Do you want to put away more than 20% of your net earnings this year? Yes: solo 401(k), because the SEP cannot get there.
4. Are you 50 or older? Yes: solo 401(k), because the $8,000 or $11,250 catch-up exists nowhere else.
5. Is it already past December 31 of the year you want to contribute for? Yes: SEP for that year, or a solo 401(k) adopted before the April due date for the employer bucket only.

For most one-person online businesses the answers land on question 3: profit is under the cap, the owner wants more than a fifth of net earnings sheltered, and the solo 401(k) is the plan that allows it. If that is you, open the solo 401(k) and sign the deferral election before December 31, 2026, and put July 31 in your calendar for the year your balance crosses $250,000.