SEP IRA vs Solo 401(k): 2026 Limits for the Self-Employed

The short version

2026	SEP IRA	Solo 401(k)
Who can use it	Any business, also with employees	Owner with no employees, or owner and spouse
Your contribution as employer	Up to 20% of net earnings	Up to 20% of net earnings
Your contribution as employee	None	Up to $24,500
Catch-up from age 50	None	$8,000, or $11,250 at 60 to 63
Total cap, without catch-up	$72,000	$72,000
Compensation counted up to	$360,000	$360,000
Roth option	Allowed for tax years after 2022	Roth deferrals; Roth employer money after 2022

The limits are the IRS figures for 2026. The SEP page sets the cap at the lesser of 25 percent of compensation or $72,000; the one-participant 401(k) page sets the same overall limit, with catch-up contributions on top.

Why 25 percent becomes 20 percent

For an employee, 25 percent means 25 percent of wages. For you as a sole proprietor, the IRS defines compensation as net earnings from self-employment after the deduction for half of your self-employment tax and after the contribution for yourself. Because the contribution reduces the base it is figured on, Publication 560 converts the plan rate with plan rate ÷ (1 + plan rate). For 25 percent that is 0.25 ÷ 1.25 = 0.20, the 0.200000 in its rate table.

Employer contribution for yourself (Publication 560 worksheet)

(net profit − ½ self-employment tax) × 20%, at most $72,000

Self-employment tax is 12.4 percent Social Security plus 2.9 percent Medicare on 92.35 percent of your net profit, with Social Security stopping at the $184,500 wage base for 2026. The self-employment tax calculator works out the tax and the half you deduct, line by line as Schedule SE does.

Maximum contributions at three profit levels

Sole proprietor, under 50, no wages from a job, no other plan. Net profit is the Schedule C figure before retirement contributions.

Net profit	SE tax	Net earnings	SEP max	Solo 401(k) max	Solo, 50+
$40,000	$5,652	$37,174	$7,435	$31,935	$37,174
$80,000	$11,304	$74,348	$14,870	$39,370	$47,370
$150,000	$21,194	$139,403	$27,881	$52,381	$60,381

Take the middle row. Self-employment tax on $80,000 is $11,304, half of it is $5,652, so net earnings are $74,348. Twenty percent of that is $14,870, the most a SEP accepts. The solo 401(k) allows the same $14,870 as the employer part plus a $24,500 deferral, $39,370 in all, roughly 2.6 times as much. At low profits the gap is widest, because the deferral is a fixed amount, not a percentage: at $40,000 a SEP takes $7,435, a solo 401(k) $31,935.

The two converge at the top. The solo 401(k) reaches $72,000 once net earnings after the half-SE-tax deduction pass $237,500; the SEP needs $360,000, which is also the $360,000 compensation limit. Above those levels both plans allow the same $72,000, and only the solo 401(k) catch-up adds more.

Deadlines to set up and fund

SEP. Publication 560 says you can set up a SEP for a year as late as the due date of your income tax return for that year, including extensions, and the contributions must be made by the same date. A SEP can be opened in April for the year before.
Solo 401(k), the plan. The general rule in Publication 560 is that a qualified plan must be set up by the last day of the year to deduct contributions for that year. There is an exception for a sole proprietor's new 401(k) adopted after the year ends: the elective deferrals for that first year must be paid to the plan before the filing deadline for the return, not counting extensions.
Solo 401(k), the money. As an owner-employee you elect your deferral by the end of the year, and Publication 560 says it can then be made by the return filing deadline including extensions. Deductible employer contributions can be made up to the due date of your return plus extensions.

Estimated tax runs on its own schedule during the year; the quarterly dates are in estimated quarterly taxes 2026.

Roth options

The SECURE 2.0 Act opened Roth money to both plans. Publication 560 says that for tax years beginning after 2022 an employer's SEP may let an employee designate a Roth IRA, and that certain nonelective and matching contributions made after 2022 can be designated as Roth. A solo 401(k) can also take designated Roth deferrals, which the Publication 560 worksheet accounts for. Roth contributions are not deductible; qualified withdrawals later are tax free. Whether a given SEP or solo 401(k) offers the Roth options depends on its plan documents and the provider.

Paperwork and other plans

Form 5500-EZ. Publication 560: a one-participant plan with total assets of $250,000 or less at the end of the plan year does not have to file it for that year. Every plan should file one for its final plan year.
A job with a 401(k) too. The $24,500 deferral limit applies to you as a person, not to each plan, so deferrals at a day job use up the same room, as 401(k) vs IRA vs Roth IRA explains.
Employees later. A solo 401(k) is only for an owner without employees, or with a spouse. The SEP limits page describes contributions to employees' SEP-IRAs, so a SEP is not limited to a business without staff.

What decides it

If the goal is the largest contribution at a modest profit, the deferral makes the solo 401(k) the bigger plan, as the table shows. If simplicity matters more, a SEP has no deferral election and can be opened after the year ends, up to the return due date with extensions. If you have employees other than a spouse, the solo 401(k) is not available. To see what a yearly amount grows to, the retirement savings calculator projects a balance. For setting a rate that leaves room to save, the hourly rate calculator lets you count retirement savings among the expenses a rate has to cover, and W-2 vs 1099 compares contractor and employee pay. This guide follows the IRS pages and Publication 560 and is not tax advice.

Frequently asked questions

Which lets me put away more, a SEP IRA or a solo 401(k)?

At most incomes the solo 401(k), because it adds an employee deferral of up to $24,500 in 2026 on top of the same 20 percent employer contribution a SEP allows. With $80,000 of net profit the SEP maximum is about $14,870 and the solo 401(k) maximum about $39,370. Both are capped at $72,000 in total, so the gap closes at high incomes.

Why is it 20 percent and not 25 percent for the self-employed?

Because your compensation is figured after your own contribution is deducted. Publication 560 converts the plan rate with the formula plan rate ÷ (1 + plan rate), which turns 25 percent into 20 percent. It is applied to net profit minus the deduction for half of your self-employment tax.

Can I have a solo 401(k) if I have employees?

No. The IRS describes a one-participant 401(k) as a plan covering a business owner with no employees, or that person and his or her spouse.

When do I have to file Form 5500-EZ?

Publication 560 says a one-participant plan with total assets of $250,000 or less at the end of the plan year does not have to file Form 5500-EZ for that year. Above that it generally must, and every plan should file one for its final plan year to show that all assets were distributed.

Are Roth contributions possible in a SEP?

Yes, since the SECURE 2.0 Act. Publication 560 says that for tax years beginning after 2022 an employer's SEP may allow an employee to designate contributions to a Roth IRA, and that certain nonelective and matching contributions can be designated as Roth. Whether you can use it depends on the plan documents and the provider.

Sources

General information based on the sources above, not tax, legal or financial advice.

Written by Tobias. Updated October 26, 2026.