Solo 401(k) vs SEP IRA: Which Fits a One-Person Business?

Solo 401(k) vs SEP IRA comes down to one fact: both accounts cap total 2026 contributions at $72,000, but a Solo 401(k) lets you contribute as both the employee and the employer, so you can put away far more on the same income. For most one-person businesses with no employees, the Solo 401(k) wins. A SEP IRA is the better pick when you need maximum simplicity, you have eligible employees, or you missed the December 31 Solo 401(k) setup window.

Here’s the way I explain it to founders: a SEP IRA rewards you for earning a lot. A Solo 401(k) rewards you for being a business of one. If you’re the only person on payroll, you get access to a retirement account built almost exactly for your situation, and most people never open it because their bank offered them the other one first.

If you’d rather see the math before you read mine, this breakdown from tax attorney Mat Sorensen walks through the same $100,000 income in both accounts and shows why one nearly doubles the other.

Solo 401(k) vs SEP IRA: Side-by-Side Comparison for 2026

Every 2026 number in that table comes straight from the IRS: the $24,500 deferral and $8,000 catch-up, and the $72,000 cap and $360,000 compensation limit that apply to both plans.

Why the Solo 401(k) Lets You Save More on the Same Income

Both accounts share the same ceiling, so a lot of people assume they’re interchangeable. They aren’t. The difference is how fast you can reach that ceiling.

A SEP IRA has one bucket: the employer contribution. You can put in up to 25% of your W-2 pay, or roughly 20% of your net self-employment earnings if you’re a sole proprietor or single-member LLC. That’s it.

A one-participant 401(k) gives you two buckets because you wear two hats. As the employee, you can defer up to $24,500 of your earnings. As the employer, you can add the same 25% (or about 20%) profit-sharing contribution the SEP allows. Stack them together and the gap gets big quickly.

Here’s what that looks like for a sole proprietor in 2026. These are rough figures based on the IRS self-employed contribution method: net profit, minus half of self-employment tax, times about 20%, under age 50.

Look at the first row. A freelancer clearing $40,000 can shelter about four times as much in a Solo 401(k). And the Solo 401(k) hits the $72,000 cap at roughly $252,000 of profit, while the SEP needs about $377,000 to get there. If you’re 50 or older, the Solo 401(k) adds the $8,000 catch-up on top. A SEP gives you nothing extra.

Run your own numbers with the IRS worksheet for calculating your own contribution, or better, with your CPA. Your exact figure depends on your profit, your entity and your other plans.

The S-Corp Salary Trap

If your business is taxed as an S corporation, your retirement contributions are based on your W-2 salary, not your total profit. That changes the math a lot.

Say you pay yourself a $60,000 salary and take the rest as distributions. A SEP lets you put in 25% of that salary, or $15,000. A Solo 401(k) lets you put in $24,500 plus that same $15,000, for $39,500. To max out at $72,000, a SEP needs a $288,000 salary. A Solo 401(k) needs about $190,000.

That’s why low-salary S-corp owners almost always land on the Solo 401(k). It also means your deferrals have to run through real payroll, withheld from your paychecks by year-end and reported on your W-2. If you’re still paying yourself with transfers and calling it a salary, fix that first. I learned that lesson when I paid people out of my personal account and called it being lean. Retirement plans don’t forgive sloppy payroll any more than the IRS does.

One more S-corp wrinkle for 2026: if you’re 50 or older and had more than $150,000 of W-2 wages from your company in 2025, your catch-up contributions now have to go in as Roth. Sole proprietors and partners with only self-employment income aren’t subject to that rule, according to the IRS’s catch-up guidance.

When a SEP IRA Is the Smarter Choice

I’m not anti-SEP. It’s a good account in the right hands. Here’s when I’d pick it:

• You have eligible employees. A Solo 401(k) only works when the only people covered are you and your spouse. Once you hire someone who qualifies, you need a different plan. A SEP can cover employees, but you have to contribute the same percentage of pay for every eligible employee that you contribute for yourself.
• You earn a lot and want almost no admin. If your profit is well above $377,000, both accounts max out at $72,000, and a SEP’s simplicity starts to look better.
• You missed the December 31 window. You can open a SEP and fund it all the way up to your tax filing deadline, including extensions. That makes it the classic “I forgot” account.
• Your income swings a lot. SEP contributions are fully discretionary. You can put in nothing in a bad year and the max in a great one.

One trade-off people miss: a SEP IRA balance counts in the pro-rata calculation if you ever do a backdoor Roth IRA conversion. A Solo 401(k) balance doesn’t. If backdoor Roth contributions are part of your plan, talk to your tax pro before you put a big balance into a SEP.

The December 31 Deadline Most Founders Miss

This is why I’m writing about retirement accounts in November and not in April.

To make 2026 employee deferrals, you should have your Solo 401(k) plan adopted by December 31, 2026, and make your deferral election by then. That’s the rule for anyone paying themselves W-2 wages through an S corp, and it’s the safe deadline for everyone else. Once the plan exists, you generally have until your tax filing deadline to actually deposit the money.

There’s one exception worth knowing. Under SECURE 2.0, a sole proprietor or single-member LLC with no employees can adopt a brand-new Solo 401(k) after year-end and still make employee deferrals for the first year, as long as the deferrals are made by the tax return due date without extensions, which is April 15 for most people. That’s helpful if you’re late, but not every provider supports it. Don’t build your plan on it.

A SEP is more forgiving. According to IRS Publication 560, you can set it up and fund it as late as your business tax return due date, including extensions. With an extension, that can push 2026 SEP contributions to September or October 2027, depending on your entity.

Retirement is one of several things you have to decide before the calendar flips. I covered the rest, from equipment timing to estimated payments, in the year-end tax moves every one-person business should make before December 31.

How to Choose Between a Solo 401(k) and a SEP IRA: 6 Steps

1. Confirm who’s on your team. If anyone other than you and your spouse works enough hours to be eligible, a Solo 401(k) is off the table. Look at a SEP, SIMPLE IRA or standard 401(k).
2. Find the right income number. Sole proprietors use net profit minus half of self-employment tax. S-corp owners use W-2 salary only.
3. Run both contributions. SEP: about 20% of net self-employment earnings (or 25% of W-2 pay). Solo 401(k): that same amount plus up to $24,500, plus catch-up if you’re 50 or older.
4. Decide on Roth vs pre-tax. If you want Roth dollars or 401(k) loan access, the Solo 401(k) is the practical choice.
5. Check the calendar. Before December 31: open the Solo 401(k) if it wins. After December 31: a SEP may be your only option for 2026, unless you qualify for the first-year sole-proprietor exception.
6. Bring it to a pro, then open the account. Choose a provider, sign the plan document, set up deferrals through payroll if you’re an S corp, and set a reminder for Form 5500-EZ once assets reach $250,000.

Common Mistakes I See With Solo 401(k)s and SEPs

• Opening a SEP by default. The bank offered it, so you took it. You may be leaving $24,500 a year of contribution room on the table.
• Using profit instead of W-2 pay as an S-corp owner. Your contribution is based on your salary. Distributions don’t count.
• Doubling up on the deferral. The $24,500 employee limit is per person across all 401(k)s. If you also have a day job with a 401(k), your Solo deferrals share that limit.
• Hiring without checking the plan. A first employee can end your Solo 401(k) eligibility. Talk to your provider before the offer letter goes out.
• Forgetting the 5500-EZ. Once a Solo 401(k) reaches $250,000, an annual filing is required. Missing it can bring steep penalties.

The Bottom Line

If you’re a business of one, a Solo 401(k) is usually the strongest retirement account available to you. You can save more on less income, you get catch-up room and a real Roth option, and you can borrow from it in an emergency. A SEP IRA earns its place when you have employees, when your profit is high enough that both accounts max out, or when the calendar has already made the decision for you.

Your business already pays you. Make sure it pays your future self too, and pick the account before December 31 picks it for you.

This article is educational and isn’t personal tax, legal or financial advice. Contribution limits, entity type and your own situation all matter. Talk to a CPA, enrolled agent or fiduciary financial adviser before you open or fund a retirement plan.

Solo 401(k) vs SEP IRA FAQs

Which is better for a one-person business, a Solo 401(k) or a SEP IRA?

For most owners with no employees, a Solo 401(k). It allows a $24,500 employee deferral on top of the same employer contribution a SEP allows, plus catch-up contributions, Roth deferrals and loans. A SEP is simpler and fits businesses with employees.

What are the 2026 contribution limits for a Solo 401(k) and SEP IRA?

Both cap total contributions at $72,000 for 2026. A Solo 401(k) adds an $8,000 catch-up at age 50 or older, or $11,250 at ages 60 to 63. A SEP has no catch-up contribution.

When is the deadline to open a Solo 401(k) for 2026?

Generally December 31, 2026, to make 2026 employee deferrals. Sole proprietors with no employees opening their first plan may adopt it by their tax filing deadline without extensions. A SEP can be opened until the return due date, including extensions.

Can I have both a Solo 401(k) and a SEP IRA?

Sometimes, but contributions from the same business share one $72,000 limit, and you can’t use the IRS model SEP form if you also maintain another retirement plan. Most solo founders pick one account. Check with your provider and tax pro first.

Does a SEP IRA allow Roth contributions?

SECURE 2.0 allows Roth SEP contributions, but many custodians still don’t offer them. SEPs also don’t allow employee deferrals. If Roth savings matter to you, a Solo 401(k) with a Roth option is usually the practical choice.