Solo 401(k) vs SEP IRA: which is right for business owners?

If you run your business without employees and you want to shelter part of your profit from tax, the choice between a solo 401(k) and a SEP IRA mostly comes down to how much you want to save, how much paperwork you will tolerate, and whether you pay yourself a W-2 salary.

A solo 401(k) lets you contribute in two roles, as the employee through a salary deferral of up to $24,500 in 2026 and as the employer through a profit-sharing contribution, so at moderate income levels it allows much more than a SEP IRA. A SEP IRA allows only the employer-side contribution, up to 25% of pay and effectively about 20% of net self-employment earnings for an owner who is not on payroll, but it is simpler to set up, has no annual filing, and can be opened and funded as late as your tax filing deadline. Both plans share the same overall cap of $72,000 for 2026, excluding catch-up contributions, so at very high income the two can end up allowing nearly the same amount. A solo 401(k) is designed for owners with no eligible employees other than a spouse, while a SEP IRA works with employees but requires you to contribute the same percentage for each eligible one.

How the two plans work

A solo 401(k), also called an individual 401(k) or a one-participant 401(k), is an ordinary 401(k) plan that covers only the business owner and a spouse. The owner wears two hats, contributing as an employee through elective deferrals that can be pre-tax or Roth, and as the employer through a profit-sharing contribution that is generally pre-tax. Many plan documents also allow loans, which are limited to the lesser of $50,000 or half of the vested balance, though whether yours does depends on the provider. Once the plan holds $250,000 or more at the end of a year, the owner has to file Form 5500-EZ with the IRS, due July 31 for a calendar-year plan, and late filings can draw penalties that add up quickly.

A SEP IRA, short for simplified employee pension, is much lighter. You adopt it by signing IRS Form 5305-SEP or a provider's equivalent, open a SEP-IRA account for yourself and each eligible employee at a bank or brokerage, and make employer contributions. There are no employee deferrals, no plan document to maintain, no annual IRS filing, and contributions are tax-deductible and fully vested. Contributions are generally pre-tax, and although the SECURE 2.0 Act allows Roth SEP contributions, few providers offer them.

The trade-off for that simplicity is how the plan treats people who work for you. A SEP must cover every employee who is at least 21, has worked for you in at least three of the last five years, and has earned at least $800 in 2026, and you must contribute the same percentage of pay for each of them that you contribute for yourself. A solo 401(k) works while you have no eligible employees other than a spouse, and once someone meets the plan's eligibility rules they generally have to be included, which turns it into a regular 401(k) with coverage and testing rules or sends you to a different plan altogether.

The 2026 limits side by side

These figures come from the IRS's 2026 cost-of-living notice, and the IRS usually announces the limits for the following year in November, so check the new numbers before you plan a 2027 contribution.

How much you can contribute

The employer contribution is where owners most often get confused, because the percentage applies to a different base depending on how your business is taxed. If you are a sole proprietor or a single-member LLC owner reporting on Schedule C, your compensation for the calculation is your net self-employment earnings reduced by half of your self-employment tax, and the 25% rate works out to an effective 20% of that figure. If you own an S corporation and pay yourself a salary, the employer contribution is up to 25% of your W-2 pay, and the profit that flows to you on your Schedule K-1 does not count.

A sole proprietor example makes the gap between the plans clear. Say your Schedule C shows $100,000 of net profit. Half of your self-employment tax is about $7,065, which leaves $92,935, and 20% of that is $18,587. A SEP IRA lets you contribute $18,587. A solo 401(k) lets you contribute the same $18,587 as the employer and then add your own deferral of up to $24,500, for a total of $43,087, and if you are 50 or older you can add the $8,000 catch-up on top.

An S corporation example works the same way with different inputs. If your company pays you an $80,000 salary, the employer contribution is 25% of that, or $20,000, and a SEP IRA stops there. A solo 401(k) allows the $20,000 plus a $24,500 deferral taken from your pay, for $44,500 in total, and the company deducts both contributions.

The advantage of the solo 401(k) shrinks as income rises, because both plans run into the same $72,000 cap. At $350,000 of net profit, a sole proprietor's employer contribution is about $66,775, so a SEP allows about $66,775 and a solo 401(k) is limited to $72,000, a difference of roughly $5,225 rather than the $24,500 gap at lower incomes. If you earn a high income and have no interest in Roth contributions or loans, the SEP can capture most of the benefit for much less administrative effort.

What S corporation owners need to know

S corporation owners face two wrinkles that sole proprietors do not. The first is that contributions are based on W-2 salary, so the salary you choose affects both your retirement contributions and your tax bill, and it has to remain reasonable for the work you do. A lower salary reduces the 25% employer contribution and also reduces the base for a deferral to come out of, which is one more reason the salary decision deserves more thought than a rule of thumb. Our guide on salary versus distributions explains how the split is taxed.

The second is timing. A sole proprietor who adopts a brand-new solo 401(k) after year end has extra time to make deferrals for the prior year under SECURE 2.0, but that relief does not extend to an S corporation, so an S corporation owner who wants to defer part of their 2026 salary needs the plan in place and the deferral election made before the year ends, since the deferral comes out of payroll.

A third point is new for 2026. Under SECURE 2.0, if your wages subject to Social Security and Medicare tax from the employer sponsoring the plan were above $150,000 in the prior year, your catch-up contributions have to be made as Roth contributions. This looks at W-2 wages, so an owner who reports only Schedule C income and has no W-2 wages is generally not affected, while an S corporation owner paid a high salary can be, and your plan provider should tell you which side you are on.

Deadlines for 2026

The deadlines differ between the two plans, and the difference is the main reason some owners choose a SEP at the last minute.

For a solo 401(k), the plan generally has to be established by December 31 for you to make employee deferrals for that year, and the deferrals themselves have to be elected by then, though a sole proprietor with no employees who adopts a plan for the first time can adopt it as late as the tax filing deadline without extensions and still make deferrals for the prior year. For 2026, that deadline is April 15, 2027, and because the exception is narrow, confirm your provider's election and deposit procedure before relying on it. The employer contribution can be made up to your filing deadline including extensions.

A SEP IRA can be opened and funded as late as your tax filing deadline including extensions, so a sole proprietor who decides in the spring of 2027 to make a 2026 contribution can do it with a SEP without having had any plan in place on December 31.

Paperwork, cost, and the lighter-weight choice

A SEP IRA is the clear winner on administration. You sign a one-page form, open accounts, and make contributions, and there is nothing to file with the IRS afterward. A solo 401(k) requires a plan document from a provider, usually an EIN for the plan, record keeping for contributions and loans, and the Form 5500-EZ filing once assets reach $250,000. Many brokerages offer solo 401(k) plans with low or no fees, so the cost is mostly the time you spend, but owners who dislike paperwork often prefer the SEP even when the solo 401(k) would allow more.

When each plan makes sense

A solo 401(k) tends to be the better choice when you want to save more than the employer contribution alone allows, when you want a Roth option or the ability to borrow, when your income is moderate and the $24,500 deferral makes a real difference, or when your spouse works in the business and can add their own deferral and contribution, which can roughly double the household total.

A SEP IRA tends to be the better choice when you want the simplest setup, when your income varies and you prefer to decide how much to contribute after the year ends, when you already have employees and will contribute for them, or when your income is high enough that you would hit the overall cap under either plan. If you have employees and want a plan that does not require contributing for everyone at your own percentage, a SIMPLE IRA or a conventional 401(k) is worth a look, and a retirement plan provider or advisor can walk through those options with you.

How the contributions show up on your return and your books

Retirement contributions you make for yourself as a sole proprietor or a member of a single-member LLC are not a business expense on Schedule C. They are deducted on your personal return, on Schedule 1, which is why they do not reduce your self-employment tax. For the books, that means a contribution paid from the business account is an owner's draw rather than an expense, a coding error that quietly understates profit and self-employment tax when it is made. For an S corporation, the employer contribution is a deductible expense of the company, and your own deferral is withheld from your salary, which lowers the income tax wages on your W-2 but not the Social Security and Medicare wages.

Contributions also interact with other deductions. They reduce your qualified business income, which slightly lowers the QBI deduction, and they reduce the net profit that limits your self-employed health insurance deduction, so owners using both should calculate them together. Our guides to the QBI deduction and the self-employed health insurance deduction explain the first and second of those.

Frequently asked questions

Can I have a solo 401(k) and a SEP IRA at the same time?

It is technically possible, but the two plans share the same overall deduction and annual contribution limits, so combining them rarely adds anything and creates extra paperwork. Most owners choose one.

Can my spouse contribute to my solo 401(k)?

Yes, if your spouse works in the business and earns compensation from it. A spouse can make their own deferral and receive their own employer contribution, which can roughly double what the household saves.

What happens to my solo 401(k) if I hire an employee?

A solo 401(k) is designed for owners and spouses only. Once you hire employees who meet the plan's eligibility rules, the plan has to cover them and you take on the coverage and testing requirements of a regular 401(k), or you move to a different plan such as a SIMPLE IRA or a SEP.

Which plan is better for an S corporation owner?

It depends on salary and savings goals. Both plans base the employer contribution on your W-2 pay, so a SEP gives you 25% of salary, while a solo 401(k) adds a deferral of up to $24,500 from your pay on top of that. An S corporation owner with a modest salary usually saves meaningfully more with a solo 401(k).

What is the deadline to open and fund a plan for 2026?

A SEP IRA can be opened and funded up to your tax filing deadline including extensions. For a solo 401(k), employee deferrals generally need a plan in place by December 31, with an exception that lets a sole proprietor adopt a first-time plan up to the filing deadline, which is April 15, 2027 for 2026.

Do I have to file anything with the IRS for a solo 401(k)?

Only once the plan's assets reach $250,000 at the end of the year, when you file Form 5500-EZ by July 31 of the following year. A SEP IRA has no annual IRS filing.