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SEP-IRA

Same employer math as a solo 401(k) — the difference is the $24,500 deferral. See both.

A SEP-IRA is employer contributions only, so its ceiling is the same "employer side" a solo 401(k) uses: 25% of W-2 wages for S-corp owners, or 20% of net earnings from self-employment (profit minus half the SE tax) for sole proprietors. The 2026 §415(c) cap is $72,000. Because there is no employee deferral, a SEP almost always loses to a solo 401(k) at the same income — unless you missed the December 31 solo 401(k) setup deadline, since a SEP can be established and funded as late as your filing deadline, extensions included.

Why people use this

Freelancers who missed the December 31 solo 401(k) setup use it as the rescue — a SEP opens and funds by the filing deadline, extensions included — and stay for the verdict: identical employer math, so the solo 401(k) advantage is exactly the deferral, and the employee-uniform-percentage trap is the real separator.

How it works

  1. Sole proprietor: net self-employment earnings = Schedule C profit − half of the 15.3% SE tax. SEP max = 20% of that figure (the circular rate that equals 25% of compensation after the contribution itself).
  2. S-corp owner: SEP max = 25% of your W-2 salary, and distributions do not count. This is why low-salary S-corp strategies shrink retirement room.
  3. The same 2026 §415(c) limit of $72,000 caps total contributions, identical to a solo 401(k).
  4. Head-to-head: the solo 401(k) adds the $24,500 employee deferral (plus catch-ups and a Roth option), so at any income below the cap it shelters exactly that much more.

Common questions

I made $100,000 in Schedule C profit. What is my SEP-IRA max vs a solo 401(k)?

Your half-SE-tax adjustment is $7,065, so net earnings are $92,935 and the SEP max is $18,587 (20%). A solo 401(k) allows the same $18,587 employer contribution plus the full $24,500 employee deferral — $43,087 total. The entire gap is exactly the deferral, which is why the solo 401(k) wins at nearly every income.

Why would anyone choose a SEP-IRA over a solo 401(k)?

Deadlines and paperwork. A solo 401(k) must be established by December 31 of the tax year; a SEP can be opened and funded up to your filing deadline including extensions — the classic rescue for freelancers who missed year-end. SEPs also skip the Form 5500-EZ filing that solo 401(k)s require once assets pass $250,000. In exchange you give up the Roth option, catch-up contributions, and loans.

I have employees. What is the SEP trap?

Uniformity. If you contribute for yourself, you must contribute the same percentage of compensation for every eligible employee (generally those 21+, who worked for you in 3 of the last 5 years, and earned at least $750). A 25% owner contribution means 25% for each of them too. Solo 401(k)s avoid this only because they require having no employees other than a spouse.

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