Solo 401(k) vs SEP IRA: Why One Shelters Far More at Freelance Incomes
At most freelance incomes a solo 401(k) shelters tens of thousands more than a SEP, because you contribute twice. Here is the mechanism and the catch.
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If you take one thing from this: at typical freelance incomes, a solo 401(k) shelters far more than a SEP IRA, and the difference is not marginal.
The mechanism
A SEP IRA has one contribution: the employer's. Roughly 20% of your net self-employment earnings.
A solo 401(k) has two. You are both the employee and the employer of your own business, and you contribute in both capacities. The IRS describes exactly this: elective deferrals as the employee, plus nonelective contributions as the employer.
What that looks like
On $100,000 of profit:
| Solo 401(k) | SEP IRA | |
|---|---|---|
| Employee deferral | $24,500 | — |
| Employer contribution | ~$18,587 | ~$18,587 |
| Total | ~$43,087 | ~$18,587 |
Same income. Roughly $24,500 more sheltered.
For a single filer with no other income, that cuts federal income tax by about $2,350 in one year, on money that is still yours. That is smaller than people expect: once half the self-employment tax, the standard deduction and the QBI deduction come off, $100,000 of profit sits in the 12% bracket, and the contributions shrink the QBI deduction as well.
The gap narrows as profit rises, because the employer side grows while the deferral stays fixed. At very high incomes both approach the $72,000 overall cap. But most freelancers are nowhere near that, which is exactly where the solo 401(k) wins biggest.
Where the 20% comes from
The employer contribution is 25% of compensation — but for a sole proprietor the contribution itself reduces the compensation it is calculated on. Solving that circularity gives an effective rate of 20% of your net profit after deducting half the self-employment tax. That is why the figure is 20% and not 25%.
The limits for 2026
- Employee deferral: $24,500
- Total annual additions: $72,000
- Catch-up, 50 and over: $8,000
- Enlarged catch-up, ages 60–63: $11,250
- Compensation cap: $360,000
The 60-to-63 window is genuinely unusual and easy to miss. It reverts to the standard catch-up at 64.
The catch worth knowing
The deferral limit is per person, not per plan. If you max a 401(k) at a day job, you have no employee deferral left for your freelance plan — though the employer contribution from self-employment is still available in full.
This is the single most common error among people who freelance alongside employment.
One piece of admin a SEP does not have
Once your solo 401(k) holds $250,000 or more at year end, you must file Form 5500-EZ annually. It is not difficult, but it is a filing obligation that creeps up quietly and carries penalties for being missed. A SEP has no equivalent.
Neither reduces self-employment tax
Worth stating plainly, because people expect otherwise.
Retirement contributions reduce your income tax. Self-employment tax is calculated on your profit before any of this. A $40,000 contribution does not touch the 15.3%.
Which to open
Solo 401(k) for almost anyone with no employees who wants to shelter more than the employer contribution alone allows. Also the practical choice for Roth money: the law has allowed Roth SEP contributions since 2023, but few providers offer them yet.
SEP IRA if you value simplicity above capacity, or if you are past the April filing deadline — a SEP can be opened and funded for last year up to the deadline including extensions.
That deadline used to be the SEP's one genuine advantage. Since SECURE 2.0, a sole proprietor opening a first solo 401(k) after year end can still set it up, and make employee deferrals for that first year, up to the filing deadline without extensions. Not every provider handles this smoothly, so opening by December is still the simpler route.
Work out your own numbers with the solo 401(k) calculator — it shows both side by side, including the catch-up you qualify for.