SEP-IRA vs. Solo 401(k): Which One Shelters More of Your Self-Employment Income?

If you run a one-person business, the two heavyweight retirement accounts are the SEP-IRA and the Solo 401(k). Both let you put away far more than a regular IRA, and both deductions come straight off your business income. The question isn’t which one is “better” in the abstract — it’s which one lets your income shelter the most money with the least hassle. The answer usually comes down to how much you earn and whether you’ll ever hire anyone.

Here’s how they actually differ in 2026.

The SEP-IRA: one lever, almost no paperwork

A SEP-IRA has exactly one contribution channel: the employer. You contribute a percentage of your compensation — up to 25% — capped at $72,000 for 2026, with the compensation that counts capped at $360,000. There’s no separate “employee” contribution. The whole thing is a profit-sharing deposit from the business to you.

That simplicity is the SEP’s selling point. It opens in minutes, there’s no annual government filing, and you can set one up and fund it as late as your extended tax deadline — which means a SEP is something you can still do for last year while you’re filing this year. For a high earner who wants a big deduction with zero administration, it’s hard to beat.

The catch is the math at lower incomes. Because the contribution is a flat percentage, you only reach the big numbers when your income is big. For a sole proprietor the effective rate works out to roughly 20% of net earnings after the self-employment-tax adjustment — so a five-figure profit produces a fairly modest contribution. The SEP doesn’t really stretch until your net self-employment income climbs well into six figures.

The Solo 401(k): two levers, much more reach at lower income

A Solo 401(k) — also called an individual or one-participant 401(k) — gives you two ways to contribute, because you’re both the employee and the employer:

• As the employee: an elective deferral of up to $24,500 in 2026 (plus an $8,000 catch-up at 50+, or an enhanced $11,250 catch-up at ages 60–63).
• As the employer: a profit-sharing contribution of up to ~25% of compensation, on top of the deferral.

Combined, those land at the same $72,000 ceiling as the SEP for someone under 50 ($80,000 at 50+) — but you get there from a much lower income. That first $24,500 is a flat dollar amount, not a percentage, so you can shelter a large share of a modest profit. At low-to-moderate income, the Solo 401(k) almost always wins, sometimes by a wide margin. The two accounts only converge once your net self-employment income is high enough that the percentage piece alone fills the cap.

The Solo 401(k) also does things a SEP can’t. It can hold Roth money, so you can choose after-tax contributions and tax-free growth. And if your spouse earns income from the business, each of you can run the full two-lever calculation — effectively doubling the household’s sheltered savings.

The decision really turns on four things

Your income. Below roughly $175,000 of net self-employment income, the Solo 401(k)‘s flat deferral lets you shelter more. Above that, the two roughly tie, and the SEP’s simplicity starts to look attractive.

Whether you have — or will hire — employees. This is the one that catches people. A SEP generally requires you to contribute the same percentage for every eligible employee as you do for yourself, which gets expensive fast. A Solo 401(k) is strictly owner-only (plus a spouse). The moment you hire a common-law employee, it stops being “solo” and has to convert to a full 401(k) with testing. If staff is on your horizon, factor that in now.

Whether you want Roth. Want tax-free growth instead of a deduction today? The Solo 401(k) handles Roth natively. Deciding between pre-tax and Roth is its own question — we walk through it in Roth IRA vs. Traditional IRA: which tax break wins.

How much paperwork you’ll tolerate. The SEP has essentially none. The Solo 401(k) requires a one-time plan document, and once plan assets cross $250,000 you file a short annual Form 5500-EZ. Not hard — but not nothing.

One 2026 rule worth flagging

Starting in 2026, if your prior-year FICA wages from the same employer topped $150,000, any catch-up contributions you make have to go in as Roth rather than pre-tax. Most pure sole proprietors aren’t affected, because the rule references wages — but S-corporation owners who pay themselves a W-2 salary should check this with their preparer before assuming a pre-tax catch-up is available.

A quick rule of thumb

One-person business, moderate income, want to shelter as much as possible, like the Roth option, no employees coming? Solo 401(k). High income, want a big deduction with near-zero admin, value the ability to decide after year-end, or might add staff? SEP-IRA.

And remember these aren’t your only moves. A personal Roth or Traditional IRA can sit alongside either one — see the four ways to fund a Roth — and if your income is variable, your plan contributions feed directly into your quarterly estimated tax math.

This article is general information, not tax, legal, or investment advice. Contribution limits, the right account, and whether Roth or pre-tax makes sense depend on your income, your business structure, and whether you have employees — let's review your specific situation before you open or fund a plan.