A freelance developer wraps a strong year — $184,500 in 1099 income — and gets a call from their accountant in February. Turns out they could have sheltered roughly $46,000 in a SEP-IRA last year. The window closed December 31. They had the money. The account just didn't exist.
Here's the part that stings: a $46,000 contribution at a 32% marginal rate saves roughly $14,700 in federal tax. Not some theoretical future savings — actual cash they would have kept. And the $46,000 is still theirs, compounding tax-deferred until retirement. They didn't lose $14,700 to bad investments or a bad client. They lost it to inaction.
Two accounts exist specifically for this situation: the SEP-IRA and the Solo 401(k). Both are built for self-employed people. Both share the same $72,000 ceiling in 2026. But they calculate maximum contributions differently in ways that produce dramatically different outcomes below $175,000 in net profit — which covers most freelancers reading this. Most people don't know which one to open, so they open neither. That's what this article fixes.
The Retirement Account Nobody Opened
The single biggest tax-reduction lever available to self-employed people is a retirement account. Not mileage logs. Not a home office deduction. A retirement contribution that reduces your taxable income dollar-for-dollar before the IRS ever calculates what you owe.
Most freelancers assume retirement accounts are for people with HR departments. They're not — the self-employed actually get better options. A W-2 employee maxes out at $24,500 in 401(k) deferrals in 2026. As a sole proprietor, you can stack an employee deferral and an employer profit-sharing contribution in the same plan, up to $72,000 total (IRS Pub 560, Chapters 2–4).
The confusion that keeps people from acting is this: the SEP-IRA and Solo 401(k) look nearly identical on paper — same ceiling, both tax-deferred, both for self-employed people — but they calculate maximum contributions very differently. That difference produces real dollar gaps below about $175,000 in net profit.
Concrete example: at $120,000 in net self-employment income, a SEP-IRA lets you contribute roughly $22,200. A Solo 401(k) lets you contribute roughly $46,700. That $24,500 gap, at a 24% marginal rate, is $5,880 in federal tax you don't pay this year. Multiply that across the years you've been filing a Schedule C without opening either account.
The other problem is that most search results either oversimplify ("just open a SEP, it's easier") or hedge so heavily they're useless. The answer actually depends on one number: your net self-employment profit. Once you have that number, the decision is straightforward.
SEP-IRA vs Solo 401(k): How Each Account Actually Works — and Who Wins
How the SEP-IRA Works
A SEP-IRA accepts employer contributions only — there is no employee deferral component. As a sole proprietor, you are both the employer and the employee, so you contribute as the employer. The limit is 25% of compensation, but for self-employed people, "compensation" means net SE income after subtracting the deductible half of SE tax. That math reduces your effective maximum to roughly 20% of net profit (IRS Pub 560, Chapter 5).
In 2026, the SEP-IRA contribution ceiling is $72,000 (IRS Pub 560, Chapters 2–4). No annual IRS filing is required until plan assets exceed $250,000. You can open a SEP-IRA and fund it up to your tax filing deadline, including extensions — meaning as late as October 15 if you file a Form 4868. That flexibility is the SEP-IRA's main practical advantage.
How the Solo 401(k) Works
A Solo 401(k) — also called an individual 401(k) or one-participant 401(k) — has two contribution buckets:
- Employee elective deferral: up to $24,500 in 2026, or 100% of net SE income if lower. Age 50–59 or 64+: add $7,500. Age 60–63 under SECURE 2.0: add $11,250 (IRS Pub 560, Chapters 2–4).
- Employer profit-sharing: same calculation as the SEP-IRA — roughly 20% of net SE income, up to a combined plan ceiling of $72,000.
The total ceiling is the same $72,000, but the employee deferral slot lets you fill that bucket from the top down rather than building up from a 20% base. That's where the math diverges at lower incomes.
You need an EIN to open a Solo 401(k) — a sole proprietor using their SSN cannot open one. Get your EIN free at IRS.gov in approximately ten minutes. The plan must also be established by December 31 of the tax year, even though you can fund it after that date (IRS Pub 560, Chapters 2–4).
The Math at $90,000 Net Profit
| SEP-IRA | Solo 401(k) | |
|---|---|---|
| Employee deferral | $0 | $24,500 |
| Employer profit-sharing (~20%) | ~$16,700 | ~$16,700 |
| Total contribution | ~$16,700 | ~$41,200 |
At a 24% marginal rate, that $24,500 gap saves approximately $5,880 in federal tax this year.
The Math at $184,500 Net Profit
| SEP-IRA | Solo 401(k) | |
|---|---|---|
| Employee deferral | $0 | $24,500 |
| Employer profit-sharing (~20%) | ~$36,000 | ~$36,000 |
| Total contribution | ~$36,000 | ~$60,500 |
The Solo 401(k) still holds a $24,500 advantage. At 32%, that's $7,840 in federal tax savings from a single structural decision.
Where the SEP-IRA Catches Up
Above roughly $175,000 in net profit, the employer profit-sharing contribution alone approaches or hits the $72,000 ceiling without needing the employee deferral slot. At that income level, both accounts converge near the same maximum. If you're in that range, the SEP-IRA's simplicity — no EIN required, no December 31 plan establishment deadline, no Form 5500-EZ filing until assets exceed $250,000 — becomes a legitimate reason to choose it.
The Roth Factor
SEP-IRAs have no Roth option. Solo 401(k) plans at most major providers allow designated Roth contributions — you put in after-tax dollars, and qualified withdrawals in retirement are tax-free. If you expect to be in a higher bracket in retirement, or you want tax diversification across account types, this is worth factoring into the decision even when the contribution dollar amounts are similar.
The Practical Decision Tree
- Net profit under $175,000: Solo 401(k) wins in nearly every scenario. The employee deferral slot produces a contribution ceiling the SEP-IRA cannot match at this income range.
- Net profit over $175,000: Run the SEP-IRA math. Once the contribution gap narrows, the administrative simplicity may justify the choice.
- S-Corp election: The compensation calculation changes significantly — your contribution base is W-2 wages paid by the S-Corp, not net Schedule C profit. Run these numbers with a CPA before contributing.
Know Your Real Net Income Before You Contribute a Dollar
Both the SEP-IRA employer contribution and the Solo 401(k) profit-sharing contribution are calculated on net SE income after subtracting the deductible half of SE tax. You cannot compute the correct contribution amount without accurate books.
Tool: Keeper Tax
Keeper Tax is AI-assisted bookkeeping built for 1099 earners — it connects to your accounts, auto-categorizes business expenses, and surfaces write-offs you would otherwise miss on your Schedule C.
The specific problem it solves here: your SEP-IRA and Solo 401(k) employer contribution percentages are calculated on your actual net self-employment income. Freelancers who estimate that number over-contribute — triggering a 6% IRS excise tax on the excess (IRS Pub 560, Chapter 1) — or under-contribute and leave deductible dollars unclaimed. Keeper gives you an accurate, running net income figure throughout the year, not a surprise number in February when it's too late to act.
[See Keeper Tax →]Keeper Tax
For a broader comparison of bookkeeping options, see Best Accounting Tools for Freelancers 2026: Top Apps + Free Tracker.
The Key 2026 Numbers
- SEP-IRA maximum contribution: $72,000 — effectively ~20% of net SE income for sole proprietors (IRS Pub 560, Chapter 5)
- Solo 401(k) employee deferral limit: $24,500 (IRS Pub 560, Chapters 2–4)
- Solo 401(k) catch-up, age 50–59 or 64+: $7,500 additional (IRS Pub 560, Chapters 2–4)
- Solo 401(k) catch-up, age 60–63 under SECURE 2.0: $11,250 additional (IRS Pub 560, Chapters 2–4)
- Solo 401(k) combined ceiling (employee + employer): $72,000 (IRS Pub 560, Chapters 2–4)
- SE tax deductible half: 50% of total SE tax, subtracted before calculating contribution base (IRS Schedule SE instructions)
- SEP-IRA excess contribution penalty: 6% excise tax per year on the amount above your limit (IRS Pub 560, Chapter 1)
- Solo 401(k) plan establishment deadline: December 31 of the tax year
- SEP-IRA funding deadline: Tax return due date plus extensions — as late as October 15 for sole proprietors who file Form 4868
- Form 5500-EZ threshold: Required annually once Solo 401(k) plan assets exceed $250,000 (IRS Form 5500-EZ instructions)
- Income crossover point: Approximately $175,000 in net SE profit, above which SEP-IRA and Solo 401(k) maximum contributions converge
Next Steps
The decision comes down to one number. Pull your most recent Schedule C. Find net profit on line 31.
If that number is under $175,000:
Open a Solo 401(k). The employee deferral slot gives you a contribution ceiling the SEP-IRA cannot reach at this income level. You need an EIN — get one free at IRS.gov. The plan must be established by December 31 of the tax year. Fidelity, Vanguard, and Schwab all offer no-fee Solo 401(k) plans with no minimum balance.
If that number is over $175,000:
Calculate your SEP-IRA maximum (net profit × ~20%). If that figure is approaching $72,000, the SEP-IRA's administrative simplicity — no EIN, no December 31 deadline, no Form 5500-EZ — may make it the better fit. If you're well below $72,000 at that income, the Solo 401(k) still wins.
If you haven't started either account:
The SEP-IRA can be opened and funded up to October 15 for last year's taxes if you filed an extension. That window is still open for some readers right now. Check your prior-year net SE income and confirm with your CPA whether you can still make a deductible contribution.
The one thing not to do: wait until next February to think about this. The Solo 401(k) establishment deadline is December 31. Missing it means a full calendar year without access to the employee deferral slot. Set a reminder for November 1.
This article is for informational purposes only and does not constitute tax, legal, or financial advice. Contribution limits, tax rules, and IRS deadlines change; verify all figures with IRS.gov or a licensed tax professional before making any contribution decisions. The Meridian may receive compensation if you purchase products through affiliate links in this article.(IRS Pub 560, Chapter 2, 3, 4)
- Solo 401(k) employee deferral: $24,500; age 50–59 or 64+: $31,000 total; age 60–63: $34,750 total (IRS Pub 560, Chapter 2, 3, 4)
- Solo 401(k) total ceiling: $72,000; age 50+: $80,000; age 60–63: $83,250 (IRS Pub 560, Chapter 2, 3, 4)
- Solo 401(k) plan establishment deadline: December 31 of the tax year
- SEP-IRA funding deadline: Tax filing deadline including extensions — October 15 with a filed Form 4868
- SE tax rate: 15.3% on net earnings up to the SS wage base; the deductible half (7.65%) reduces the contribution base (IRS Pub 334, Chapter 1)
- SS wage base 2026: $184,500 — above this, only the 2.9% Medicare portion applies (IRS Pub 505, Chapter 2)
- Tax savings on a $30,000 contribution at 32%: approximately $9,600 in federal tax alone
- Excess contribution excise tax: 6%, reported on Form 5330 (IRS Pub 560, Chapter 2, 3, 4)
These numbers adjust every January — verify before acting.
How to Stop Leaving This Money on the Table
1. Get your actual net self-employment income this week. Pull your Schedule C from last year — line 31 is your net profit. Then subtract the deductible half of SE tax (Schedule 1, line 15). That is your contribution base. If you don't have clean books for 2025 yet, Keeper Tax is the fastest path to that number before you make any contribution decisions for 2026.
2. If your net profit is under $175,000, open a Solo 401(k). Fidelity and Vanguard both offer individual 401(k) plans with no annual fees and no minimum. You need an EIN — apply free at IRS.gov in about ten minutes. The account can be open and funded in the same week.
3. Set a phone reminder for December 31 titled "Solo 401k must exist today." You can fund it in January. You cannot establish it in January for the prior tax year. This one calendar alert is worth thousands of dollars.
4. If you're above $75,000–$80,000 net and still filing as a sole prop, ask an accountant about S-Corp election before year-end. The SE tax savings often change the contribution math in ways that compound quickly above that income level.
Want the free year-end tax planning checklist — the one that tells you by November 15 exactly how much to contribute, what to put aside for quarterly payments, and which moves have to happen before December 31? Subscribe at https://themeridian.blog/free-worksheet.
Frequently Asked Questions
Can I open a SEP-IRA and a Solo 401(k) in the same year?
Technically yes, but contributions are coordinated. The total annual additions limit — $72,000 in 2026 — applies across all defined contribution plans you maintain as the same employer (IRS Pub 560, Chapter 2, 3, 4). Running both accounts doesn't give you a higher ceiling; it just adds administrative complexity. The exception is if you have a side job with a separate unrelated employer, where different plan limits apply — but for a single self-employed business, running both plans is rarely worth it.
What is the Solo 401(k) contribution limit for 2026?
The total limit is $72,000 in 2026, combining the employee elective deferral ($24,500) and the employer profit-sharing contribution (roughly 20% of net SE income for sole props). If you're 50–59 or 64 and older, the catch-up contribution brings the total to $80,000. If you're 60–63, the SECURE 2.0 enhanced catch-up brings it to $83,250 (IRS Pub 560, Chapter 2, 3, 4).
Can anyone confirm the self-employment tax process — am I understanding Schedule C, SE tax, and quarterly estimates correctly?
Yes. Your net profit from Schedule C flows to Schedule SE, where you pay 15.3% SE tax on 92.35% of net earnings up to the $184,500 SS wage base in 2026 — above that, only the 2.9% Medicare portion applies (IRS Pub 334, Chapter 1). You deduct half of that SE tax on Schedule 1, line 15, which reduces your adjusted gross income. Your retirement contribution is also deducted on Schedule 1, line 16. Quarterly estimated tax payments are due April 15, June 15, September 15, and January 15 — to avoid an underpayment penalty, you need to cover at least 90% of your current-year tax or 100% of last year's tax liability (110% if your AGI exceeded $150,000) (IRS Pub 505, Chapter 2).
What happens if I miss the Solo 401(k) establishment deadline of December 31?
You cannot open a Solo 401(k) in 2026 and apply it retroactively to 2025. The plan document must be signed and the plan formally established by December 31 of the tax year for which you want to make contributions (IRS Pub 560, Chapter 2, 3, 4). If you miss it, you're not entirely out of options — a SEP-IRA can still be opened and funded up to October 15 of the following year if you file an extension. It's a meaningful consolation: the SEP won't let you use the employee deferral bucket, but 20% of net SE income is still a real deduction.
This article is for educational purposes only and is not tax, legal, or financial advice. Tax rules change and dollar thresholds adjust annually. Consult a qualified CPA, EA, or tax attorney for guidance on your specific situation. Meridian Press and Morgan Hayes disclaim any liability for actions taken based on the contents of this article.