SEP IRA vs Solo 401(k) for Freelancers: Which Lets You Save More? (US)

DRAFT — NOT CPA/LEGAL-REVIEWED — in Compliance HOLD until a qualified CPA/legal reviewer is engaged; do not describe as reviewed.

Educational only. This guide explains a system; it is not personal advice for your situation. Before you act on any tax or retirement figure here, consult a tax professional.

Short answer: At most freelance incomes, the Solo 401(k) lets you put away more, because it adds an employee deferral on top of the employer contribution — at $100,000 of net profit, about $43,087 versus about $18,587 for a SEP IRA. The SEP wins on simplicity: no plan document, no annual filing, and you can open and fund it up to your tax-filing deadline. The crossover is not really about income. It is about how much paperwork you will tolerate and whether you have employees.

Who this is for: A US freelancer with no full-time employees (a spouse working in the business is a special case — check the plan rules) who is choosing their first retirement account, or wondering whether the one they have is still the right one.

Who this is not for: Anyone with full-time W-2 employees cannot use a Solo 401(k) at all — it is for owner-only businesses. If you have employees, the SEP's "same percentage for everyone" rule changes the maths completely, and this comparison does not apply to you directly.

First, the one formula that trips everyone up

For a sole proprietor, a SEP IRA contribution is not 25% of your net profit. It is effectively 20%, and the reason is a piece of circular maths the IRS resolves for you. Your "plan compensation" is your net profit minus half your SE tax. Then you multiply by 20%, not 25%, because the contribution itself reduces the income it is based on. IRS Publication 560 has the worksheet; the 25% rate is what applies to an employee's pay, not to your own net earnings.

Work it once, slowly, at $100,000 of net profit:

That is well under the 2026 SEP dollar cap of $72,000 (with only the first $360,000 of compensation counted), so the percentage, not the cap, is what binds at this income. The most common SEP mistake is multiplying net profit by 25% and over-contributing by thousands. If you take one number from this guide, take the 20%.

The comparison, at three incomes

A Solo 401(k) has two parts: an employee deferral (up to $24,500 for 2026, under 50) plus an employer profit-sharing contribution, which for a sole proprietor works out to the same effective 20% of plan compensation as the SEP. Both parts together cannot exceed $72,000 for 2026. Figures below are maximums, not targets — you can always contribute less, including zero in a bad year under a SEP (and, for the employer part of a Solo 401(k), the same flexibility applies; the deferral part must be made during the year).

At $60,000, the Solo lets you save roughly three times the SEP amount. At $100,000, more than twice. That gap is the whole story at ordinary freelance incomes: the deferral is a second bucket the SEP simply does not have.

Two honest caveats. At $30,000, the $24,500 deferral headline is misleading on its own: your total Solo contribution cannot exceed your earnings under the plan rules, so the earnings cap binds before the headline does. Do not read the $30,000 row as "$24,500 plus $5,576." And at very high incomes the two converge toward the same $72,000 cap, where the SEP's simplicity starts to look attractive again — at $360,000 of plan compensation, 20% is $72,000, and both plans hit the same ceiling.

The differences that are not about the amount

Deadlines — this is where freelancers lose money. A Solo 401(k) generally must be established by 31 December of the tax year for employee deferrals to count for that year, even though employer contributions can be made up to the filing deadline with extensions. A SEP IRA can be both established and funded up to the filing deadline with extensions. So if it is February and you are staring at last year's profit wishing you had saved, a SEP is still open to you for that year. A Solo 401(k) deferral for that year is not. Miss the December deadline and you have lost a year's deferral room permanently.

Catch-ups. Only the Solo 401(k) offers them: an extra $8,000 of deferral at age 50+ for 2026 (total cap $80,000), and an enlarged $11,250 catch-up at ages 60–63 under SECURE 2.0 (total cap $83,250). A SEP IRA has no catch-up contributions at all.

Paperwork. A SEP IRA is about as close to "open an account and contribute" as retirement plans get. A Solo 401(k) needs a plan document and, once plan assets pass $250,000, an annual Form 5500-EZ filing. Neither is a reason on its own to choose, but if you know you will never file the form, that is useful self-knowledge.

Roth. A Solo 401(k) can offer a Roth deferral option (after-tax now, tax-free qualified withdrawals later) if the plan document allows it; a SEP IRA is traditionally pre-tax, but since SECURE 2.0 — for plan years after 31 December 2022 — a plan may allow SEP contributions to be designated as Roth instead, where the plan and the provider offer that election, so check both before assuming either way. Whether Roth or pre-tax suits you depends on your current versus expected future tax rate — and that is a conversation for a tax professional, not a rule this guide will hand you. A plain Roth IRA ($7,500 for 2026, $8,600 at 50+, income limits apply) can also sit alongside either plan; see Guide C3.

Employees. A Solo 401(k) is out if you have full-time employees other than a spouse. A SEP requires the same contribution percentage for eligible employees (generally 21+, worked 3 of the last 5 years, earned at least $800 in 2026 — up from $750 in prior years). Hiring your first employee can therefore flip this whole comparison — another reason to revisit the choice when the business changes, not just when the tax year does.

A decision framework, not a verdict

• Income under ~$60,000 and you want to save as much as possible: the Solo 401(k)'s deferral usually dominates, if you open it before year-end.
• You value simplicity above maximum saving, or it is already past year-end and you want last year covered: the SEP.
• You are 50+ and want catch-up room: only the Solo offers it.
• You might hire soon: think twice before building everything around an owner-only plan.
• You are not sure you will save consistently: either works, because both let you contribute little or nothing in a slow year. The best plan is the one that actually gets funded in a good month.

Checklist

• No full-time employees (or the SEP employee rule has been priced in).
• Solo 401(k) established by 31 December if deferrals for that year are wanted.
• SEP maths done at 20% of plan compensation, not 25% of net profit.
• Contribution checked against the $72,000 cap (and $360,000 compensation ceiling).
• Catch-up eligibility checked if 50+ (Solo only).
• Form 5500-EZ trigger ($250,000 plan assets) noted if choosing Solo.

What to do next

1. Work the comparison at your own income using the three-income table.
2. Check the decision framework, not just the amount.
3. Consult a tax professional before choosing an account.

Sources

• IRS Publication 560, Retirement Plans for Small Business (SEP and Solo 401(k) calculation worksheets; reduced 20% rate for self-employed).
• IRS Notice 2025-67, 2026 amounts for retirement plans and IRAs (IRA $7,500 / $8,600 at 50+; Solo 401(k) deferral $24,500 / +$8,000 at 50+ / +$11,250 at 60–63; combined cap $72,000; SEP cap $72,000, compensation ceiling $360,000, SEP minimum compensation $800; SIMPLE IRA $17,000 — noted for comparison only).
• SECURE 2.0 Act §601 (Roth designation of SEP contributions, for plan years after 31 December 2022; IRS Notice 2024-02 guidance on administration).
• IRS Retirement Plans FAQs Regarding SEPs (no catch-up; funding up to filing deadline with extensions).
• IRS Solo 401(k) guidance (establishment by year-end for deferrals; Form 5500-EZ above $250,000 in plan assets).
• IRS Publication 334 (SE-tax maths behind plan compensation).

Source links: IRS Publication 560 · IRS announcement of Notice 2025-67, 2026 retirement-plan limits · IRS Publication 334

Educational only. This is a comparison, not a recommendation for your situation — consult a tax professional before choosing or contributing. Figures are for tax year 2026, reviewed 25 Oct 2026. Verify current-year limits at contribution time, as the IRS adjusts them annually.

Before you act: tax and retirement rules change, and your situation has details a guide cannot see. For any figure you plan to file, claim, or contribute on the basis of this page, consult a tax professional first.

Related guides and tools

• the retirement hub
• how much to save for retirement on uneven income
• whether a Roth IRA can sit alongside a SEP IRA or Solo 401(k)
• retirement deadlines and catch-up contributions after 50

Dated assumptions: draft content as checked 25 October 2026; tax and retirement figures are for tax year 2026 where stated. Verify current-year limits, rates, and deadlines before acting, as the IRS adjusts them annually.