Solo 401(k) vs SEP IRA: 2026 Max Contribution by Profit

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, what happens if you run both plans or already defer at a day job, where a SIMPLE IRA fits, and a six-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. The rest of the creator tax guide, every form, tax and calculator in filing order, is at Creator Taxes.

To see your own limits, enter your profit in the solo 401(k) and SEP IRA contribution calculator.

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.

Is there a “SEP 401(k)”?

No. People search for it, and there is no plan with that name. It usually means one of three things.

The first is simply this comparison: a SEP IRA or a 401(k), which one. The second is the solo 401(k) itself, which providers market under names like “self-employed 401(k)” or “individual 401(k)”; the IRS name is one-participant 401(k). The third is the one real hybrid, the salary-reduction SEP, or SARSEP. It let employees defer part of their pay into a SEP, but the IRS says only SARSEPs established before 1997 can keep operating. If you are opening a plan in 2026, it is not on the menu.

The distinction that matters is who puts the money in. The IRS SEP limits page states it flatly: elective salary deferrals and catch-up contributions are not permitted in SEP plans. Everything a SEP holds came from the employer side. A 401(k) adds the employee side on top, and that second bucket is the entire $24,500 difference you will see in the tables below.

The feature table

Limits collected from irs.gov on September 14, 2026 and re-checked against the IRS cost-of-living table on September 28, 2026; none had changed.

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 and the $184,500 Social Security wage base; inputs re-verified September 28, 2026.

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 of its own. The IRS SEP FAQ does allow an owner over 50 to put the regular IRA catch-up into the SEP-IRA if the account accepts IRA contributions, but that is the ordinary IRA allowance, not extra SEP room. For anyone over 50 the gap between the plans is therefore $32,500 below the cap, not $24,500.

Some 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, or if you have a spouse

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.

Can you have both a SEP IRA and a solo 401(k)?

Legally, yes. Usefully, almost never. The IRS SEP FAQ answers the question directly: you can maintain a SEP and another plan, but unless the other plan is also a SEP, you cannot use the model Form 5305-SEP and need a prototype or individually designed SEP document instead. That already removes the SEP’s main selling point, the one-page setup.

The limit does not stretch either. Publication 560 tells you to add together your contributions to all defined contribution plans you maintain, and it counts a SEP as one of them for this purpose. So a SEP and a solo 401(k) from the same business share one $72,000 annual-additions ceiling for 2026. Two accounts, one cap, double the paperwork.

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), provided the plan document accepts rollovers. The clean sequence is to stop SEP contributions, open the 401(k), and roll the SEP in, rather than running both. The SEP FAQ also confirms you are not required to contribute to a SEP every year, so a year with no SEP deposit is not a violation.

If you also defer into a 401(k) at a day job

This is the case the comparison tables skip, and it flips the answer for a lot of side businesses. The IRS one-participant 401(k) page warns that an owner who also participates in another company’s 401(k) has elective deferral limits that apply by person, not by plan. The $24,500 for 2026 is one allowance across every 401(k) you touch.

Say your employer’s plan already takes the full $24,500 from your paycheck this year. Your solo 401(k) then has no employee-deferral room left for 2026. What remains is the employer contribution from your side business, and that is computed the same way in both plans: about 20% of net earnings. At that point the solo 401(k) and the SEP shelter the same amount, and the SEP does it with less paperwork. The solo 401(k) only earns its keep if you want its Roth option or loan feature, or if your day-job deferral is well under $24,500 and the leftover room is worth claiming.

Where a SIMPLE IRA fits

Several comparison pages add a third option, the SIMPLE IRA, so here is where it lands for one person. A SIMPLE lets you defer $17,000 for 2026 as the employee, and the business then matches up to 3% of compensation. For a sole proprietor, Publication 560 defines that compensation as net earnings from line 4 of Schedule SE, before subtracting the SIMPLE contribution, which is 92.35% of net profit.

Run the same profit levels through that formula and the SIMPLE sits between the other two:

SIMPLE column: $17,000 deferral plus a 3% match on 92.35% of net profit, computed September 28, 2026. The IRS also announced a higher $18,100 deferral for “certain applicable” SIMPLE plans under SECURE 2.0; if your provider’s plan qualifies, add $1,100 to each SIMPLE figure.

Below roughly $107,000 of net profit the SIMPLE beats the SEP, because its $17,000 deferral does not depend on profit. Above that, the SEP’s 20% overtakes it. The solo 401(k) beats both at every level in the table.

The rules around a SIMPLE are also tighter. The IRS SIMPLE page says the employer cannot have any other retirement plan, so it rules out running a SEP or 401(k) alongside it. A new SIMPLE can generally only be set up effective between January 1 and October 1, so as of this update, September 28, 2026, the window for this year closes in days; the SEP and solo 401(k) stay open far longer. Withdrawals in the first two years of participation carry a 25% additional tax instead of the usual 10%, and a tax-free rollover to a non-SIMPLE IRA is allowed only after those two years. Catch-up is $4,000 at 50 and $5,250 at ages 60 through 63. For a one-person business with no plans to hire, the SIMPLE solves a problem the solo 401(k) already solves better.

Six 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. Do you already defer the full $24,500 into a 401(k) at another job this year? Yes: SEP, unless you specifically want a Roth or loan feature; the solo 401(k)’s extra bucket is used up.
3. Is your 2026 net profit above about $252,500? Yes: both plans reach $72,000; the SEP is simpler and equal, unless question 5 applies.
4. 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.
5. Are you 50 or older? Yes: solo 401(k), because the SEP has no catch-up of its own and the solo plan’s $8,000 or $11,250 is the largest on offer.
6. 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 4: 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.