Suppose you clear a six-figure net profit this year as a one-person business, and you want to shelter as much of it as the law allows. Should you open a SEP-IRA or a Solo 401(k)?
Both plans stop at the same ceiling: $72,000. Neither of them lets an ordinary solo owner get anywhere near it. And on identical income, one will take roughly twice as much as the other.
The ceiling is not the constraint. The ladder is.
Tax Disclaimer: This article provides educational information based on IRS Publication 560 and the IRS 2026 contribution limits, and is not tax advice. Consult a certified CPA or tax professional for individual advice.
The Mechanism, One Step at a Time
Both plans let you contribute as the employer. Neither lets you use your gross revenue to do it. The IRS makes you climb down to a smaller number first, in three steps.
- Start at net profit. Your Schedule C bottom line.
- Subtract half your self-employment tax. SE tax runs at 15.3% on 92.35% of net profit, with the Social Security portion capped at $184,500, and you deduct 50% of it here.
- Take 20% of what is left. A plan written at a 25% employer rate becomes an effective 20% for a self-employed owner, because the contribution is itself deductible from the base it is calculated on. The IRS resolves that circularity with the Rate Worksheet for the Self-Employed in Publication 560.
Compensation for that percentage is capped at $360,000, which is not an accident: 20% of $360,000 is exactly $72,000. The employer rung reaches the ceiling at precisely the moment the compensation cap does, and not one dollar sooner.
That is the whole SEP-IRA. Step three is the answer.
The Solo 401(k) runs the same three steps and then adds a rung underneath: you are also your own employee, so you can make an elective deferral of up to $24,500 on top. The combined total still stops at $72,000, but you arrive there from a much lower profit.
What the Gap Looks Like
Take $100,000 of net profit and walk the steps.
Net earnings for SE tax purposes: $100,000 × 92.35% = $92,350. Self-employment tax at 15.3% on that: about $14,130. Half of it, deducted: about $7,065. So the contribution base is $100,000 − $7,065 = $92,935.
- SEP-IRA: 20% × $92,935 = $18,587.
- Solo 401(k): $24,500 employee deferral + $18,587 employer = $43,087.
Same income, same year, same ceiling. A $24,500 difference, which is the deferral, arriving in full.
Now age the owner to 62 and nothing else. The catch-up sits on top of the ceiling rather than inside it, so the Solo 401(k) becomes $43,087 + $11,250 = $54,337. The SEP stays at $18,587, because a SEP has no employee side to catch up on.
Those figures are arithmetic on a round number, not a determination about your return. Run your own through the Solo 401(k) and SEP calculator, which does the same three steps against the 2026 limits.
The Catch-Up Rungs
If you are 50 or older, the deferral gets a companion. The 2026 catch-up is $8,000, and it rises to $11,250 for ages 60 through 63 before dropping back. It stacks on top of the $72,000 limit rather than counting against it, which is why a 62-year-old owner can land above the ceiling and a 45-year-old cannot.
A SEP has no catch-up at all. There is no employee in a SEP to defer anything.
The Two Deadlines That Actually Decide This
Here is the part that turns an article into a calendar entry.
A SEP is forgiving. You can “set up the SEP plan for a year as late as the due date (including extensions) of your income tax return for that year” (IRS). You can decide in October 2027 to fund a 2026 SEP.
A Solo 401(k) is half forgiving. A sole proprietor with no employees can adopt the plan after the tax year ends, as long as it is adopted by the tax filing deadline without regard to extensions. But the employee side runs on a different clock: the deferrals “must be elected by the end of the tax year and can then be made by the tax return filing deadline, including extensions” (IRS Publication 560).
Elected by December 31. Funded later. That is the rung you cannot retrieve in April, and it is the entire reason the Solo 401(k) beat the SEP by $24,500 in the example above.
What It Does Not Do
One correction, because it is the most common misreading of these plans and it will affect your September 15 estimated payment.
Contributions you make for yourself are deducted on line 16 of Schedule 1 (Form 1040), not as a business expense on Schedule C (IRS Publication 560). Self-employment tax is computed off the Schedule C number. So the contribution lowers your income tax and leaves your SE tax exactly where it was.
That is still a real deduction. It just is not a 15.3% one. Budget accordingly when you work out what to send the IRS in September. Our 1099 tax estimator separates the two so you can see which half moves.
The Bottom Line
For a solo owner with no employees, the Solo 401(k) wins, and it is not close at ordinary income levels. The employee deferral is worth $24,500 of shelter that a SEP structurally cannot offer, and the gap only closes at the very top of the range where both plans hit the same ceiling anyway. The SEP’s one genuine advantage is procedural: it can be created and funded after the year is over, so it is the plan you use when you have already missed December 31.
Which is the practical instruction. If you think there is any chance you will want the deferral for 2026, open the Solo 401(k) and make the election before the year ends. Work out what the two rungs are worth on your own numbers in the Solo 401(k) and SEP calculator first, and if the deduction is going to change your quarterly payment, do it before the September 15 deadline rather than after it.
