Solo 401(k) vs SEP IRA: 2026 Contribution Math

Both calculations start with adjusted net earnings

A sole proprietor does not simply multiply Schedule C profit by 25%. The contribution base generally reflects net earnings after the deductible part of self-employment tax, and the circular employer-contribution formula produces an effective 20% rate for a sole proprietor.

Your own W-2 wages can reduce the Social Security portion of self-employment tax and therefore change the deductible half slightly. Entity type matters: an S-Corp generally uses W-2 compensation rather than Schedule C net earnings.

Why the Solo 401(k) often allows more

For 2026, an eligible participant can make an employee deferral up to the annual limit, then add an employer profit-sharing contribution subject to compensation and overall plan limits. Age-based catch-up contributions may sit above the regular defined-contribution limit.

Employee deferrals are shared across workplace 401(k), 403(b), and similar plans. A freelancer with a day-job plan cannot use the full employee limit twice. Employer contribution limits are calculated separately for unrelated employers.

Why someone still chooses a SEP IRA

A SEP can be simpler to open and administer and generally has no participant-loan or employee-deferral layer. That simplicity can be attractive when profit is high enough for the employer contribution alone to approach the desired amount.

The employee rule is a major decision point. A business with eligible employees generally must contribute the same percentage of compensation for each SEP participant. A Solo 401(k) is designed for an owner-only business and generally cannot remain solo after eligible employees are added.

Contribution room is not the same as a recommendation

A maximum contribution calculator answers what may fit under simplified limits, not what the business can safely afford. Maintain tax reserves and operating cash before locking money into a retirement plan.

Deadlines, plan documents, Roth catch-up rules, controlled groups, spouse participation, and entity compensation can change the result. Confirm the contribution with the plan provider or tax professional before funding it.

Also separate the deadline to establish a plan from the deadline to fund each contribution type. They can differ by plan, taxpayer, and year, and extensions may affect the available window. Save the adoption agreement, elections, confirmations, and calculation used so the contribution shown on the return can be traced to the plan records. Reconcile the deposit with the provider statement before filing.