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📐 Verified Sep 29, 2026 against IRS 2026 retirement plan limits (news release IR-2025-111 and Notice 2025-67), the IRS SEP, SIMPLE IRA and one-participant 401(k) pages, and IRS Publication 560's rules for self-employed contributions. The example is for a sole proprietor; business structures and plan documents change the details. This is general information, not tax advice. How we check numbers →
The short answer
If you work for yourself with no employees, a Solo 401(k) usually lets you save the most, because you contribute both as the employee ($24,500 for 2026) and as the employer. A SEP IRA is simpler but allows only the employer share, and a SIMPLE IRA suits small businesses with employees. At $100,000 of profit, the Solo 401(k) allows about $43,087 against $18,587 for a SEP.
Numbers That Matter
| Rule or figure | What it says | Source | Verified |
|---|---|---|---|
| 401(k) employee deferral | $24,500 for 2026, plus $8,000 catch-up at 50 or older ($11,250 at ages 60 to 63) | IRS IR-2025-111 | Sep 29, 2026 |
| Total contribution limit | $72,000 for 2026 across employee and employer contributions, not counting catch-ups | IRS Notice 2025-67 | Sep 29, 2026 |
| SIMPLE IRA deferral | $17,000 for 2026, plus $4,000 catch-up at 50 or older; the employer adds a 3% match or 2% of pay | IRS SIMPLE IRA plan | Sep 29, 2026 |
| SEP IRA | Employer contributions only, up to 25% of compensation (for the self-employed, 20% of net earnings after half of self-employment tax) | IRS Publication 560 | Sep 29, 2026 |
| Solo 401(k) | For a business owner with no employees other than a spouse; you contribute as both employee and employer | IRS one-participant 401(k) plans | Sep 29, 2026 |
The Three Plans at a Glance
| Plan | Best for | How you contribute | Paperwork |
|---|---|---|---|
| Solo 401(k) | Owners with no employees (a spouse can join) | Employee deferral up to $24,500, plus about 20% of net earnings as employer, up to $72,000 total | Plan document; an annual Form 5500-EZ once assets pass $250,000 |
| SEP IRA | Simplicity, variable income, or a few employees | Employer share only: about 20% of net earnings for the self-employed | Minimal; eligible employees must get the same percentage |
| SIMPLE IRA | Small businesses with employees | Deferral up to $17,000, plus a 3% match or 2% of pay | Light; generally set up by October 1 for the current year |
Worked Example: $100,000 of Self-Employment Profit
🧮 Worked Example: A Sole Proprietor Under 50
- The base: self-employment tax on $100,000 is about $14,130; subtracting half of it leaves $92,935 of net earnings for plan purposes.
- SEP IRA: 20% of $92,935 = $18,587.
- Solo 401(k): $24,500 as the employee plus $18,587 as the employer = $43,087.
- SIMPLE IRA: $17,000 plus a 3% match, roughly $19,800.
- Income tax saved at 22%: about $4,089 with the SEP, $9,479 with the Solo 401(k) and about $4,300 with the SIMPLE. Contributions don't reduce self-employment tax.
Figures are rounded; S corporation owners base contributions on W-2 salary instead.
Decision Rules
If this, then that
- If you have no employees and want to save as much as possible → a Solo 401(k).
- If you want the least paperwork, or your income swings year to year → a SEP IRA.
- If you have employees who want to save from their own pay → a SIMPLE IRA.
- If you also have a 401(k) at a day job → your employee deferrals share one $24,500 limit across both plans.
- Always → check deadlines before year-end: a SEP can be opened and funded up to your tax-filing deadline, including extensions, while other plans have earlier setup dates.
Mistakes to avoid
- Calculating the employer share on gross profit instead of net earnings after half of self-employment tax.
- Opening a Solo 401(k) after hiring employees who must be covered.
- Exceeding the shared deferral limit when you also contribute at a day job.
- Missing the Form 5500-EZ once plan assets pass $250,000.
- Assuming contributions cut self-employment tax.
💼 Self-Employed Retirement Calculator
Enter your profit or S corp salary to see exactly what a SEP IRA, Solo 401(k) and SIMPLE IRA let you save in 2026, with catch-ups and the tax each saves.
Run the numbers →
Related: freelancer tax setup, self-employed taxes, catch-up contributions in 2026 and the Retirement & FIRE hub.
Frequently Asked Questions
Which is better for a self-employed person, a SEP IRA or a Solo 401(k)?
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If you have no employees, a Solo 401(k) usually allows more at the same income because you contribute as both employee and employer. At $100,000 of profit, that's about $43,087 against $18,587 for a SEP. A SEP is simpler to run.
How much can I contribute to a Solo 401(k) in 2026?
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Up to $24,500 as the employee, plus an employer contribution of about 20% of net self-employment earnings, with a $72,000 total limit. Catch-ups come on top: $8,000 at 50 or older, or $11,250 at ages 60 to 63.
Can I have employees with a Solo 401(k)?
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No. A one-participant 401(k) covers the owner and a spouse only. With eligible employees, a SEP must give them the same contribution percentage, and a SIMPLE IRA lets them defer from their own pay.
When is the deadline to open a SEP IRA?
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You can open and fund a SEP IRA up to your tax-filing deadline for the year, including extensions. SIMPLE IRAs generally must be set up by October 1 for the current year.
Do retirement plan contributions reduce self-employment tax?
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No. Contributions reduce income tax, but self-employment tax is figured on your net earnings before them.