Solo 401(k) vs SEP IRA Calculator

Solo 401(k) vs SEP IRA — The Key Difference

Both Solo 401(k) and SEP IRA share the same overall annual contribution cap ($70,000 for 2026, per IRS Notice 2024-80, plus $7,500 catch-up for age 50+). The difference is how you reach the limit. Solo 401(k) stacks two contribution types: an "employee" elective deferral up to $23,500 (or $31,000 with catch-up) plus an "employer" profit-share of up to 25% of net SE earnings. SEP IRA has only the 25% employer side, no employee deferral. The result: a sole proprietor with $80,000 net SE income can contribute about $38,000 to a Solo 401(k) ($23,500 + ~$14,500 employer) but only $14,500 to a SEP. The Solo 401(k) advantage shrinks as income rises — at roughly $250,000+ net SE income, both plans hit the same $70,000 cap. Source: IRS COLA tables for 2026. Last updated May 2026.

When Solo 401(k) Wins

Solo 401(k) is the right choice for most self-employed in five scenarios: (1) Income under $250K — the employee deferral lets you save more on lower income; (2) You want a Roth option — Solo 401(k)s now offer Roth designated accounts (SECURE 2.0 also added Roth match in 2023+); SEP IRAs only offer pre-tax until SECURE 2.0 Roth SEP rollout still being clarified by IRS; (3) You want to take a 401(k) loan — Solo 401(k) allows up to $50K or 50% of balance; SEP IRA prohibits loans; (4) Your spouse works in the business — both can contribute up to the full $70K each, doubling household savings; (5) You're age 60-63 — SECURE 2.0 super-catch-up of $11,250 (2026) only applies to 401(k) plans. Per IRS Solo 401(k) guidance, Solo 401(k) plans need a Form 5500-EZ filing once balance exceeds $250,000.

When SEP IRA Wins

SEP IRA is better in three specific situations: (1) You're high-income with no need for the employee deferral — at $300K+ net SE, both plans hit the $70K cap, so SEP's simplicity wins (no Form 5500, no plan document); (2) You make irregular contributions — SEP allows you to fund 0% one year and 25% the next without restriction, while a Solo 401(k) requires more setup work; (3) You're contributing for employees — SEPs require employer contributions for all eligible employees at the same percentage, but the simplicity is preferred for businesses with W-2 staff. Tax filing trap: SEP contributions can be made (and deducted) up to your tax filing deadline including extensions (typically October 15 for sole props who filed Form 4868). Solo 401(k) contributions also extend to deadline, but the plan must be established by December 31 of the contribution year (per SECURE Act 2.0, the establishment deadline is now also tax filing date for the employer profit-share portion).

How the 25% Employer Calculation Actually Works

The "25% of net SE income" formula is misleading because the calculation goes through self-employment tax adjustments. The actual computation: (net Schedule C profit − 50% SE tax) × 0.20 = employer contribution for sole proprietors. The 25% becomes 20% effectively because the contribution is computed on net earnings after deducting half of SE tax and after deducting the contribution itself (a circular calculation simplified by the IRS Pub 560 rate table to 20% for sole proprietors / 25% for S-Corp W-2 wages). For an S-Corp owner, the formula is cleaner: 25% of W-2 wages directly. Example: $100K net Schedule C → ~$92,350 after half SE tax → ~$18,470 employer profit-share + $23,500 employee deferral = $41,970 total Solo 401(k); SEP would only offer the $18,470. Per IRS Publication 560, the rate worksheet handles the circular math automatically.