When You’re Your Own Boss, You’re Also Your Own 401(k)
When you work for a shop or a contractor, retirement saving is easy to start: you check a box, and money comes out of every paycheck before you see it. Go out on your own, as a mobile mechanic, an electrician with your own clients, or a handyman doing it full time, and that box disappears. Nobody sets up a plan for you, nobody matches anything, and the IRA most people default to only lets you put away $7,500 a year.
There are two plans built for this: the SEP IRA and the Solo 401(k). Both are cheap or free to open, both let you put away far more than an IRA, and both cut your tax bill now. But they’re not equal. For most self-employed people without employees, one of them lets you save a lot more of the same income.
Short version: A SEP IRA lets you contribute about 20% of your net self-employment earnings. A Solo 401(k) lets you contribute that same 20%, plus up to $24,500 more as an “employee” contribution, plus catch-up contributions after age 50, all within a 2026 cap of $72,000. On $60,000 of business profit, that’s about $11,150 in a SEP versus about $35,650 in a Solo 401(k). A SEP is simpler and can be set up as late as your tax filing deadline, including extensions. A Solo 401(k) only works if you have no employees besides a spouse, and once it holds more than $250,000 you have a yearly IRS form to file. If you also have a 401(k) at a day job, the $24,500 employee limit is shared between the two plans.
The Two Plans in Plain English
SEP IRA stands for Simplified Employee Pension. It’s an IRA that your business contributes to. There’s only one kind of contribution, the employer contribution, and it’s a percentage of your earnings. You open it at a brokerage the same way you’d open any IRA.
Solo 401(k), sometimes called an individual 401(k), is a regular 401(k) plan for a business with no employees other than the owner and the owner’s spouse. Because you’re both the employer and the employee, you get to contribute in both roles:
- As the employee, you can put in up to $24,500 for 2026, the same limit as any workplace 401(k), plus catch-up contributions if you’re 50 or older.
- As the employer, you can add a profit-sharing contribution of about 20% of your net self-employment earnings, the same amount a SEP allows.
That stacking is the whole difference.
2026 Limits at a Glance
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Employer contribution | About 20% of net self-employment earnings (25% of W-2 pay if you’re an S-Corp) | Same |
| Employee contribution | None | Up to $24,500 |
| Catch-up at 50+ | None | $8,000 ($11,250 at ages 60 to 63) |
| Total cap | $72,000 | $72,000, plus catch-ups |
| Roth option | Allowed by law, but not every provider offers it | Allowed, but not every provider offers it |
| Loans | No | Allowed if the plan includes them |
| Employees | Must contribute the same percentage for eligible employees | Only owner and spouse allowed |
| Yearly paperwork | None | Form 5500-EZ once the plan holds over $250,000 |
| Deadline to open | Your tax filing deadline, including extensions | See “Deadlines” below |
Why “about 20%,” not 25%
You’ll see “25% of compensation” quoted everywhere. That’s the rule for employees. For a sole proprietor or single-member LLC owner, your compensation is your net profit minus half of your self-employment tax, and the contribution itself is subtracted too. The math works out to roughly 20% of your net profit after the self-employment tax deduction. Tax software and plan providers do this calculation for you, but if you see 25% applied straight to your profit, the number is too high.
What It Looks Like in Real Dollars
These are for a sole proprietor under 50, using the 2026 rules:
| Net business profit | SEP IRA maximum | Solo 401(k) maximum |
|---|---|---|
| $30,000 | About $5,600 | About $27,900 |
| $60,000 | About $11,150 | About $35,650 |
| $100,000 | About $18,600 | About $43,100 |
| $150,000 | About $27,900 | About $52,400 |
At lower and middle incomes, the Solo 401(k) lets you save several times more. On $30,000 of profit, you could shelter nearly all of what’s left after self-employment tax, if you can afford to. As income climbs toward the $72,000 cap, the gap narrows, but it doesn’t close until profits are well into six figures.
You don’t have to max out either plan. Both let you put in any amount up to the limit, and you can skip a year entirely.
If You Also Have a Day Job With a 401(k)
This is common in the trades: a W-2 job at a shop or plant, plus a side business on nights and weekends. It changes the math.
The $24,500 employee limit is per person, not per plan. If you put $24,500 into your work 401(k), you can’t put any more employee contributions into a Solo 401(k). If you put in $10,000 at work, you have $14,500 of employee room left for the Solo 401(k).
The employer contribution is separate. Your side business can still make its roughly 20% employer contribution to a SEP or Solo 401(k), no matter what you do at your day job.
Here’s an example. You max out your work 401(k) and earn $20,000 of profit from weekend side work. A SEP and a Solo 401(k) both let you contribute about $3,700 from the side business. Since you have no employee room left, a SEP is the simpler choice. But if you don’t use your work 401(k), or put in only enough to get the match, a Solo 401(k) can shelter much more of that $20,000, since you can use the leftover employee room there.
Traditional or Roth
Both plans can now accept Roth contributions, thanks to changes in the law in 2022, but providers have been slow to offer them, especially for SEP IRAs. If Roth matters to you, ask before you open the account.
- Traditional contributions lower your taxable income this year, and you pay income tax when you withdraw in retirement.
- Roth contributions don’t lower your taxes now, but qualified withdrawals in retirement are tax-free.
Neither choice changes your self-employment tax, which is owed on your profit either way. If you’re in a low tax bracket now, often true in the first years of a business, Roth tends to make more sense. Roth IRA vs. Traditional IRA covers how to think about it.
A 2026 note for high earners: starting this year, workers over 50 with more than $150,000 in FICA wages must make their catch-up contributions as Roth. A sole proprietor has no FICA wages, since self-employment income isn’t reported on a W-2, so the rule generally doesn’t apply. It does apply to S-Corp owners paid more than $150,000 in W-2 salary. Confirm with your plan provider if you’re near that line.
Deadlines That Trip People Up
SEP IRA: you can open it and make your contribution as late as your tax filing deadline, including extensions. For 2026 contributions, that means April 15, 2027, or October 15, 2027, if you file an extension. That makes a SEP the easy fix if you’re doing your taxes and realize you owe more than you expected.
Solo 401(k): the rules depend on your business structure.
- Sole proprietors and single-member LLCs with no employees can now open a Solo 401(k) for a year as late as their personal tax filing deadline, April 15, 2027, for 2026, and still make employee contributions for that first year, thanks to SECURE 2.0. After the first year, you generally need to decide on your employee contribution by December 31, though you can deposit the money later.
- S-Corps generally need the plan in place and the salary deferral election made by December 31, since deferrals come out of W-2 paychecks.
- Employer contributions for both can usually be deposited up to the business’s tax filing deadline, including extensions.
The safest habit: open a Solo 401(k) in the fall, before the year ends, so every option stays open.
Hiring Changes Everything
A Solo 401(k) only works with no employees other than you and your spouse. Once you hire someone who qualifies for the plan, typically anyone working 1,000 hours a year, and under newer rules, part-timers who work at least 500 hours a year for two years in a row, you have to move to a regular 401(k) with all its testing and costs, or switch plans.
A SEP covers employees too, but you have to include them. Every eligible employee gets the same percentage you give yourself. Eligible generally means 21 or older, employed in at least three of the last five years, and paid at least $800 in 2026. If you give yourself 20%, you give your helper 20% of their pay as well.
If you’re planning to hire, hiring your first employee covers what changes, and it’s worth talking to the plan provider before you do.
Where to Open One, and What It Costs
Most big brokerages offer both plans with no setup fee and no annual fee, including Fidelity and Schwab. Vanguard sold its Solo 401(k) business to Ascensus in 2024, so check current fees there if you already have one. Before you pick one, check:
- Roth contributions: does it allow Roth employee contributions in the Solo 401(k), or a Roth SEP?
- Loans: some Solo 401(k) plans let you borrow from your balance. Many free plans don’t.
- Rollovers in: can you move an old employer 401(k) or IRA into it?
- Investment choices and fund fees. Low-cost index funds are what you want. See what index funds are.
The one piece of paperwork: once a Solo 401(k) holds more than $250,000 at the end of a year, you file a short Form 5500-EZ with the IRS by July 31 of the following year. The penalties for forgetting are steep, so put a reminder on your calendar once your balance gets close. SEP IRAs don’t have this filing.
The Tax Side
Contributions for yourself as a sole proprietor are deducted on your personal return, on Form 1040, not on Schedule C. That means they cut your income tax, but not your self-employment tax, which is figured on your profit before the deduction. Employee contributions to a Solo 401(k) work the same way for sole proprietors.
If you’ve formed an S-Corp, contributions are based on the W-2 salary you pay yourself, not on the profits you take as distributions. A low salary means a low contribution limit, which is one more thing to weigh when setting your salary. S-Corp vs. LLC covers that trade-off.
Retirement contributions also lower the income used for your quarterly estimated taxes, so if you contribute steadily through the year, you can often pay less each quarter. The 1099 tax reality covers the rest of self-employment taxes.
So Which One?
Choose a Solo 401(k) if:
- You have no employees besides a spouse, and don’t plan to hire soon
- You want to save more than about 20% of your profit
- You don’t already max out a 401(k) at a day job
- You want Roth contributions or the option of a loan
Choose a SEP IRA if:
- You want the simplest possible setup, with no yearly IRS filing
- You’re contributing only around 20% of profit anyway, or you already max out a work 401(k)
- It’s already tax season and you want to make a contribution for last year
- You have employees and want a plan that covers them simply
Plenty of people start with a SEP because it’s quick, then switch to a Solo 401(k) once their business and savings grow. You can roll a SEP into a Solo 401(k) later if the plan accepts rollovers.
Your Next Step
- Look at your net profit for this year so far and estimate the full year.
- Decide how much you can realistically put away. Even 10% of profit is a strong start.
- Pick the plan: Solo 401(k) for maximum savings, SEP for simplicity.
- Open it before December 31 if it’s a Solo 401(k), to keep every option open.
- Contribute what you can, and adjust your quarterly estimated taxes to match.
If you’re still choosing between a Roth IRA and a workplace plan for money outside your business, 401(k) vs IRA covers the order to fund them in. And if you got a late start, how to catch up on retirement savings shows how much the catch-up years can make up.
This article is for general informational purposes only and isn’t financial, legal, insurance, or tax advice. For guidance specific to your situation, talk to a licensed professional.
Frequently Asked Questions
A SEP IRA allows only an employer contribution of about 20% of net self-employment earnings. A Solo 401(k) allows that same employer contribution plus an employee contribution of up to $24,500 for 2026, and catch-up contributions after age 50. A SEP is simpler, while a Solo 401(k) usually lets you save much more of the same income.
Both plans have a 2026 cap of $72,000. For a sole proprietor, the SEP maximum is about 20% of net profit after the self-employment tax deduction. A Solo 401(k) adds up to $24,500 in employee contributions, plus $8,000 more at age 50 or older, or $11,250 at ages 60 to 63. On $60,000 of profit, that’s about $11,150 in a SEP versus about $35,650 in a Solo 401(k).
Yes, if you have self-employment income from a side business. The $24,500 employee contribution limit is shared across all your 401(k) plans, so whatever you put in at work reduces your Solo 401(k) employee room. The employer contribution from your side business is separate and doesn’t depend on your work plan.
A SEP IRA can be opened and funded up to your tax filing deadline, including extensions. Sole proprietors with no employees can open a Solo 401(k) as late as their tax filing deadline and still make first-year employee contributions, under SECURE 2.0. S-Corps generally need the plan set up by December 31. Opening before year-end keeps every option open.
A Solo 401(k) only works when the business has no employees besides the owner and spouse. Once you hire someone eligible for the plan, generally anyone working 1,000 hours a year or part-timers with 500 hours a year for two straight years, you need to move to a regular 401(k) or a different plan. A SEP IRA can cover employees, but you must contribute the same percentage for them as for yourself.
No. For sole proprietors, contributions are deducted on your personal tax return and lower your income tax, but self-employment tax is figured on your business profit before the deduction. Roth contributions don’t lower your income tax now, but qualified withdrawals in retirement are tax-free.
Sources
IRS Notice 2025-67, 2026 amounts relating to retirement plans and IRAs: https://www.irs.gov/pub/irs-drop/n-25-67.pdf
IRS, Simplified Employee Pension Plan (SEP): https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep
Carry, Solo 401(k) deadlines and contribution limits for 2026: https://carry.com/learn/solo-401k-deadlines-contribution-limits
Solo401k.com, Roth catch-up rule 2026 for Solo 401(k) owners: https://www.solo401k.com/blog/roth-catch-up-rule-2026-solo-401k/
NAPA, Vanguard to exit individual 401(k) business with Ascensus deal: https://www.napa-net.org/news/2024/4/breaking-vanguard-exit-individual-401k-business-ascensus-deal/