A Solo 401(k) lets you contribute at least as much as a SEP-IRA at every level of income, and usually much more. Both plans stop at the same $72,000 ceiling for 2026, but the Solo 401(k) reaches it on far less income because it adds a flat employee deferral on top of the employer formula. The SEP-IRA's advantage is administrative, not mathematical.
The 2026 numbers
| Item | 2026 |
|---|---|
| Overall limit per employer (IRC §415(c)) | $72,000 |
| Solo 401(k) employee deferral | $24,500 |
| Catch-up, ages 50–59 and 64+ | +$8,000 (total $80,000) |
| Catch-up, ages 60–63 | +$11,250 (total $83,250) |
| Compensation cap (IRC §401(a)(17)) | $360,000 |
| Social Security wage base | $184,500 |
| HSA, deductible above the line | $4,400 self-only / $8,750 family |
You'll see $72,000 called the highest limit ever. It is, in nominal dollars: the limit is indexed and rises most years, so every year sets a record. That's framing, not information.
The formula that causes most of the mistakes
The employer contribution is not "25% of income" for everyone. The formula depends on how your business is taxed.
S-corp owner-employee: 25% of your W-2 wages.
Schedule C filer (sole proprietor, single-member LLC, partner):
- Net profit × 0.9235 = net earnings from self-employment
- Net earnings − one-half of your self-employment tax = plan compensation
- Plan compensation × 20% = maximum employer contribution
This is not a "lesser of" test. You use one formula or the other based on entity type. The common error is applying 20% or 25% straight to net profit and skipping steps 1 and 2. That overstates the contribution by roughly 7–8% and creates an excess subject to a 10% excise tax under IRC §4972.
The same formula drives the Solo 401(k) employer piece and the whole SEP-IRA contribution. Below the ceiling, the Solo 401(k) advantage is exactly the employee deferral: $24,500, at every income level.
Where each plan actually maxes out
Sole proprietor, under 50, 2026 figures:
| Schedule C net profit | Solo 401(k) | SEP-IRA |
|---|---|---|
| $50,000 | ~$33,000 | ~$8,500 |
| $100,000 | ~$41,600 | ~$17,100 |
| $200,000 | ~$58,600 | ~$34,100 |
| ~$273,500 | $72,000 | ~$49,700 |
| ~$408,000 | $72,000 | $72,000 |
The gap never closes until both plans hit the ceiling at roughly $408,000 of net profit. There is no income band where a SEP-IRA allows more.
On a W-2 from an S-corp the thresholds are roughly $190,000 of wages for the Solo 401(k) and $288,000 for the SEP. That links two decisions owners make separately: minimizing your wage to save payroll tax also caps your retirement contribution. The wage still has to be reasonable for the work.
Worked example. Age 52, S-corp, $120,000 W-2: $24,500 deferral + $8,000 catch-up + $30,000 employer (25% of wages) = $62,500 sheltered.
Feature comparison
| Solo 401(k) | SEP-IRA | |
|---|---|---|
| Employee deferral | $24,500 | None |
| Employer contribution | 25% of W-2 wages, or ~20% of adjusted net SE earnings | Same formulas |
| Catch-up at 50+ | Yes | No |
| Roth | Deferrals, and employer contributions if the document allows | Permitted since 2023, but few custodians offer it |
| Participant loans | Only if the plan document permits | No |
| Annual filing | Form 5500-EZ once assets exceed $250,000 | None |
| Setup deadline | Generally Dec 31 (see the exception below) | Filing deadline including extensions |
| Employees | Owner and spouse only | Allowed; eligible employees get the same percentage |
Two claims to unlearn. SEP-IRAs are not Roth-ineligible: SECURE 2.0 §601 permitted Roth SEP contributions for tax years after 2022 (Notice 2024-2), with the amount included in your income. The obstacle is custodian support, not the law. And Solo 401(k) Roth treatment isn't limited to deferrals; §604 allows employer contributions to be designated Roth if the plan permits.
Loans and Roth employer contributions are plan-document features, not automatic 401(k) features. The free prototype documents at Fidelity, Schwab and Vanguard generally do not allow loans, and many haven't adopted the Roth employer provision. Read the document before you pick a provider. The loan limit is the lesser of $50,000 (reduced by your highest outstanding balance in the prior 12 months) or the greater of half your vested balance or $10,000.
Deadlines, and the exception that saves people
| Item | Date |
|---|---|
| Solo 401(k) plan document adopted (general rule) | December 31, 2026 |
| SEP opened and funded: sole prop, single-member LLC, C-corp | October 15, 2027 |
| SEP opened and funded: S-corp, partnership | September 15, 2027 |
| Form 5500-EZ, if assets exceed $250,000 | July 31, 2027 |
| Federal estimated tax | Apr 15, Jun 15, Sep 15, Jan 15 |
Note the split. A universal "October 15" makes S-corp and partnership owners miss SEP funding by a month.
The December 31 Solo 401(k) deadline has a large exception. Under SECURE 2.0 §317, an owner of an unincorporated business who is the only employee can adopt a new 401(k) after year end, as late as the unextended return due date (April 15, 2027 for calendar-year 2026), and make retroactive elective deferrals for that first plan year. First plan year only, and not for incorporated owners. If you file Schedule C and think you missed the window, you may not have.
The Form 5500-EZ late-filing penalty runs $250 per day up to $150,000. Set a reminder as the plan nears $250,000.
Mandatory Roth catch-up: probably not you
Under SECURE 2.0 §603, catch-up contributions must be Roth if your prior-year FICA wages from the employer sponsoring the plan exceeded $150,000. For 2026 catch-ups the test is your 2025 wages against $150,000, not the $145,000 figure tied to 2024 wages.
The part most articles get backwards: the final regulations confirm the rule doesn't apply to a participant with no FICA wages from the plan sponsor in the prior year. Sole proprietors and partners pay self-employment tax, not FICA, so they can generally still make pre-tax catch-ups at any income. S-corp owner-employees are the ones who need to check, and the plan document has to permit Roth catch-up. Many stock documents don't.
Three things that shrink the tax saving
Self-employment tax is unchanged. Your own contribution is deducted on Schedule 1, not Schedule C, so it cuts income tax only. Any figure blending income-tax and SE-tax savings is inflated.
QBI gets clawed back. A pre-tax contribution reduces qualified business income, cutting your §199A deduction by 20% of the contribution. That's a real slice of the benefit for pass-through owners, and the strongest argument for Roth deferrals, which don't reduce QBI.
The $72,000 limit is per employer, not per plan. You can't stack a SEP and a Solo 401(k) on the same business. Separately, the $24,500 deferral limit is per person across every 401(k) and 403(b) you're in, which matters if you freelance alongside a day job.
The Florida angle
No state income tax means a pre-tax deduction saves federal tax only. In a state that taxes income, the same contribution also cuts a state bill. The deduction is worth less here, which tilts the call toward Roth: choosing Roth in Florida costs you federal tax and nothing else. Whether that's right depends on your expected retirement bracket, your QBI position, where you'll live when you withdraw, and your estate goals. Weigh those with an advisor rather than a rule of thumb.
Florida Statute 222.21 shields IRA and qualified plan balances from creditors under state law. In federal bankruptcy, traditional IRAs and amounts rolled over from qualified plans are treated differently, so a rollover can change your protection.
For non-resident founders, "no income tax" applies to individuals. Florida imposes a 5.5% corporate income and franchise tax on C corporations and entities taxed as corporations. Both plans also require earned income: W-2 wages or self-employment earnings. A founder who owns a US C-corp and takes no compensation has no base to contribute on.
If you have employees
A SEP lets you keep employees, but you must contribute the same percentage for every eligible one. Eligibility softens that: at least 21, worked for you in 3 of the last 5 years, and at least $800 in 2026 compensation. The 3-of-5 rule means recent hires can often be excluded for years.
A Solo 401(k) can't cover a non-spouse employee. Once one becomes eligible you convert to a regular 401(k) or move to a SEP or SIMPLE.
On SIMPLE IRAs, the "2–3% employer match" you'll read elsewhere is wrong. You pick one of two: a dollar-for-dollar match up to 3% of compensation, or a 2% nonelective contribution paid to every eligible employee whether or not they defer. The 3% match can drop to as low as 1% in 2 of any 5 years. Eligibility is 100 or fewer employees who received $5,000 or more from you last year.
What to do next
- Project net profit or W-2 wage from last year's return plus a year-to-date P&L, and redo it quarterly.
- Run the formula for your entity type. Schedule C: the 0.9235 and half-SE-tax steps. S-corp: your wage decision is your contribution ceiling.
- Choose on administration, not capacity. The Solo 401(k) wins on capacity at any income. Pick the SEP for no plan document, no 5500-EZ, or a later retroactive setup.
- Read the plan document before choosing a custodian if you want loans or Roth employer contributions.
- Set Roth vs pre-tax against your QBI position, not by default.
- Confirm current-year figures before funding. Every limit here is indexed.
Want the math run on your actual numbers, with the entity-type formula and the QBI interaction built in? Book a strategy call with Accounting BOSS. We'll model both plans and document the calculation so the deduction holds up.
This is general information, not tax advice for your situation, and reading it does not make you a client. Rules and figures change — verify anything time-sensitive before you act on it. We'll talk it through with you free.
Common questions
The Solo 401(k), at every income level. Both plans use the same employer formula, and the Solo 401(k) adds a $24,500 employee deferral on top of it for 2026. The two are only equal once your Schedule C net profit reaches roughly $408,000, where both hit the $72,000 ceiling. There is no income band where a SEP-IRA allows more. Choose a SEP for the lighter administration, not for contribution room.
More than most articles say. As a sole proprietor you need roughly $273,500 of Schedule C net profit to reach $72,000 in a Solo 401(k), and roughly $408,000 to get there with a SEP-IRA. If you pay yourself a W-2 from an S-corp, the figures are about $190,000 of wages for the Solo 401(k) and $288,000 for the SEP. Note that $360,000 is the compensation cap, not the income needed to max out.
Maybe not. Under SECURE 2.0 §317, an owner of an unincorporated business who is the only employee can adopt a new 401(k) after year end, as late as the unextended return due date, and make retroactive elective deferrals for that first plan year. The exception covers the first plan year only and does not apply to S-corps or other incorporated owners. If it doesn't apply to you, a SEP-IRA can still be opened and funded through your extended filing deadline.
Yes, since tax years beginning after 2022. SECURE 2.0 §601 permitted Roth SEP and SIMPLE contributions, and IRS Notice 2024-2 covers the mechanics. The contribution is included in your income in the year you make it. The practical obstacle is that many custodians still don't offer a Roth SEP, so confirm before you count on it.
Only if your prior-year FICA wages from the employer sponsoring the plan exceeded $150,000. For 2026 catch-ups that means your 2025 wages. The final regulations confirm the rule does not apply to a participant with no FICA wages from the plan sponsor in the prior year, which describes most sole proprietors and partners — they pay self-employment tax, not FICA. If the rule does apply to you, check that your plan document actually permits Roth catch-up contributions.
No. Your own contribution is deducted on Schedule 1, not Schedule C, so the self-employment tax base is unchanged. It reduces income tax only. A pre-tax contribution also reduces your qualified business income, which trims your §199A deduction by 20% of the contribution. Any savings estimate that ignores both of these is overstated.