SEP-IRA vs Solo 401(k) for the Self-Employed: 2026 Limits and What a Contribution Saves

By Tallyvane, independent developer and publisher · Tax year 2026 · Published September 8, 2026 · Written from the documents listed at the end; not tax advice.

A sole proprietor has two mainstream ways to put pre-tax money into a retirement account beyond an ordinary IRA: a SEP-IRA, which takes an employer contribution only, and a solo 401(k), which takes an employee deferral as well as the employer contribution. Both are deducted from gross income, both leave self-employment tax untouched, and both are computed from the same figure — net earnings after the ½-SE-tax deduction. The difference is the ceiling, which favors the 401(k) at every level of net earnings below about $360,000, and the paperwork, which favors the SEP. This guide gives the 2026 limits, the arithmetic behind them, the deadlines, and what a contribution is worth in tax.

The 2026 limits

Why 25% becomes 20%

The employer contribution is limited to 25% of compensation (§408(k)(3)(C) for a SEP, §404(a)(3) for a 401(k)). For an employee that is a straightforward fraction of wages. For a self-employed person, "compensation" means net earnings from self-employment after two subtractions: the deductible half of self-employment tax, and the contribution itself (§401(c)(2), §404(a)(8)). Because the contribution reduces the base it is measured against, 25% of the reduced base works out to 20% of net earnings before the contribution. Publication 560's rate worksheet reaches the same 20% by dividing 25% by 1.25.

The elective deferral in a solo 401(k) is not subject to that fraction; it is limited only by the dollar cap and by net earnings. That is where the difference between the two plans comes from. At $60,000 of profit, a SEP allows $11,152; a solo 401(k) allows the same $11,152 plus a $24,500 deferral, $35,652 in total.

At small profits a third limit takes over. Section 415(c)(1)(B) caps annual additions at 100% of compensation, and compensation for a self-employed person is net earnings after the employer contribution (§401(c)(2)(A)(v)) with elective deferrals added back (§415(c)(3)(D)). That works out to employer ≤ (net earnings − deferral) ÷ 2, the step Publication 560's Deduction Worksheet performs at lines 11 and 12. A dollar of employer money costs two dollars of headroom against one for a dollar of deferral, so below roughly $40,833 of net earnings the worksheet's answer is to defer and contribute little or nothing as employer. The first rows of the table below show the effect.

Ceilings by profit level

Single filer, Schedule C profit with no other earned income. Net earnings are profit less the ½-SE-tax deduction.

In the middle of the range the gap is at its widest, then closes again: the 20% employer share alone reaches the $72,000 cap at about $360,000 of net earnings, and above that the two plans allow the same amount except for the catch-up, which sits on top of the cap for those old enough to use it. The solo 401(k) column in the first row is not the SEP figure plus the deferral, for the compensation reason above.

The deferral figure in the table assumes no 401(k) deferrals at a job. The $24,500 limit is per person, not per plan: an employee who defers $15,000 through an employer's 401(k) has only $9,500 of deferral left for a solo plan, though the employer share of the solo plan is unaffected.

What a contribution saves

A single filer with $100,000 of profit puts $20,000 into a solo 401(k) (a SEP-IRA would allow only $11,152 on this profit).

The filer starts in the 22.0% bracket, but the contribution saves 15.1% of its amount rather than 22.0%. Two things pull the figure down. The QBI deduction shrinks: the regulations treat retirement contributions as attributable to the business (Reg. §1.199A-3(b)(1)(vi)), so a $20,000 contribution also removes $4,000 of QBI deduction, and only $16,000 of taxable income actually disappears. And the reduction carries taxable income from the 22.0% bracket down into the 12.0% bracket, so the last dollars are saved at 12.0% rather than 22.0%. Self-employment tax is unchanged because Schedule SE is computed on Schedule C profit before adjustments. In a state that starts from federal AGI the contribution reduces state tax as well — $1,101 in New York for this filer. Pennsylvania and New Jersey allow no deduction for it. The calculator with these inputs shows the case for any state.

Deadlines

A SEP-IRA can be established and funded for 2026 at any time up to the due date of the 2026 return including extensions — October 15, 2027 for a sole proprietor on extension. That flexibility is the SEP's main advantage: the contribution can be decided after the year's profit is known.

A solo 401(k) is more constrained on the employee side. Under the SECURE 2.0 Act (§317, for plan years beginning after 2022), a sole proprietor with no employees can adopt a solo 401(k) after the year ends and still make elective deferrals for that first year, provided the plan is adopted and the deferrals made by the return's original due date — April 15, 2027 for 2026 — without regard to extensions. In later years, elective deferrals have to be elected by December 31 of the year they are for, though the money can follow. The employer contribution to a 401(k) follows the SEP rule and can be made up to the extended due date.

Choosing between them

The 401(k) allows more at every level of profit below roughly $360,000, permits Roth contributions, allows loans if the plan document provides for them, and is not counted as an IRA for the pro-rata rule that complicates backdoor Roth conversions — a point that matters to anyone with a large SEP balance who later wants to convert. The SEP requires no plan document beyond Form 5305-SEP or the custodian's equivalent, no annual filing at any asset level, no deferral election before year-end, and it can be opened in the week before the return is filed. A proprietor who wants to contribute less than 20% of net earnings gains nothing from the 401(k)'s extra room and can take the simpler plan.

Neither plan reduces self-employment tax, the estimated-tax safe harbor, or the earned income used for the child tax credit and earned income credit; all of those are computed before the deduction. Both reduce AGI, which helps with the child tax credit phase-out, the QBI phase-in range, and the premium tax credit.

A business that later hires employees changes the picture: both plans must then cover eligible employees at the same percentage as the owner, and a solo 401(k) ceases to be "solo". That is a plan-design question for a professional rather than a calculator.

Documents this guide was written from

• IRS Notice 2025-67 — 2026 dollar limitations: §415(c)(1)(A) $72,000, §402(g)(1) $24,500, §414(v) catch-up $8,000 and $11,250
• IRS: 401(k) and profit-sharing plan contribution limits — second reading of the same limits
• IRS: SEP contribution limits — 25% of compensation; no elective deferrals in a SEP
• Treas. Reg. §1.199A-3(b)(1)(vi) — retirement plan deductions reduce qualified business income
• IRS Publication 560, Retirement Plans for Small Business — the self-employed rate worksheet (20% of net earnings) and plan set-up deadlines

Figures in the tables are computed by the same engine as the site's calculators from its 2026 data files; the methodology page lists the rules and their verification status, and the editorial policy says how sources are chosen. Tallyvane is not a CPA, enrolled agent or attorney.

Related

• SEP-IRA contribution calculator
• Solo 401(k) contribution calculator
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• Quarterly estimated tax calculator