SEP-IRA vs Solo 401(k): Which Shelters More of Your Income

Almost every freelancer who starts earning real money hears about the same account: the SEP-IRA. A SEP-IRA is a retirement account for self-employed people that lets you put away money and take a tax deduction now. The accountant mentions it. The brokerage features it. It sounds like the grown-up version of a regular IRA. So people open one, put money in, and never look at the other option.

For most freelancers, a Solo 401(k) protects more of your money from tax than a SEP-IRA at the same income. A Solo 401(k) is also a retirement account for self-employed people, but it works in a different way. Often the gap between the two is big. The SEP only catches up when your net profit (your income after business costs) is well into the six figures. Below that, the Solo 401(k) wins, because it has one option the SEP cannot offer. This post walks through why, with the real numbers, so you can pick the account that keeps more of your money.

1.What Each Account Is

Both accounts let self-employed people save for retirement and take a tax deduction today. Both have the same total cap on what you can put in. The difference is how you are allowed to put money in.

A SEP-IRA has exactly one way to add money. You put money in as the boss, up to 25% of your compensation (your pay from the business). That is the only option. There is no second way to add money. Whatever 25% of your compensation works out to is your maximum, and not a dollar more.

A Solo 401(k) has two ways to add money, because the IRS lets you count as both the worker and the boss. You put in money as the worker, called an employee deferral (money you put in as the worker). You also put in money as the boss, called an employer contribution or profit sharing (money you put in as the boss). The boss side works almost the same as the SEP. The worker side is extra room the SEP does not have.

2.The Worker Contribution Does the Heavy Lifting

The Solo 401(k) employee deferral (money you put in as the worker) for 2026 is $24,500. You can put up to that much of your net self-employment income straight into the plan, before any percentage math starts. If you are 50 or older, you can add an extra $8,000. That extra amount for older savers is called a catch-up. With it, you can put in $32,500.

The SEP has nothing like this. A SEP only takes boss contributions. So the worker option does not exist on a SEP at all. That one missing piece is the whole reason the two accounts split apart. It matters most at the incomes real freelancers actually earn.

Walk through it on $100,000 of net profit. Start with the boss math, which is the same for both accounts. Your self-employment tax (the 15.3% Social Security and Medicare you pay on top of income tax) on $100,000 is about $14,130. Half of that, or $7,065, comes off before the retirement math. That leaves $92,935. The boss contribution rate for a sole proprietor works out to 20% of that number. The 25% headline rate shrinks to 20% once you apply it to income after the contribution itself. You can see this in the IRS rate table in Pub 560, the IRS guide for self-employed retirement plans. Twenty percent of $92,935 is about $18,600. Both accounts get you there.

Now the Solo 401(k) adds the worker contribution on top:

Same income, same boss contribution. The Solo 401(k) shelters about 2.3 times as much. The gap is the $24,500 worker contribution. It is a real tax deduction, not an accounting trick. At a 24% federal bracket, that extra $24,500 cuts your tax bill by close to $5,900 for the year.

A SEP lets you save a percentage of your income. A Solo 401(k) lets you save that same percentage plus a flat amount. At freelance incomes, the flat amount adds up to more than the percentage.

3.When the SEP Catches Up

The worker advantage shrinks as income climbs. At some point, 20% of your net profit is large enough to reach the $72,000 cap on its own. Once that happens, the worker contribution has no room left, and the two accounts end up in the same place.

That crossover happens at a high income. You have to be earning well into the mid-six-figures of net profit before the SEP's percentage alone reaches the cap. That is because the real rate is 20%, not the 25% on the label. The IRS also caps the pay that counts at $360,000 for 2026. Past that, neither account grows. If you are a freelancer netting $90K, $120K, or $180K, you are nowhere near the crossover. The Solo 401(k) puts tens of thousands more into a tax shelter every year.

4.When the SEP Is the Better Pick

The Solo 401(k) does not win in every case. There are real situations where the SEP is the smarter pick. They come down to simplicity and timing.

• You are funding it after year-end. You can open and fund a SEP as late as your tax filing deadline, including extensions. So you can open one in, say, September and still make a deductible contribution for the prior year. The Solo 401(k) is stricter on timing (more on that below).
• You want zero paperwork. A SEP is one form to open, with no annual filing, ever. A Solo 401(k) needs a yearly form called Form 5500-EZ once the account balance passes $250,000. Form 5500-EZ is a short IRS report on the plan. It is a small but real chore.
• You plan to hire employees. A SEP must cover eligible employees at the same percentage you give yourself, which gets expensive. A Solo 401(k) is built only for an owner and a spouse, so it stops working the moment you bring on a full-time W-2 hire. If you are about to add staff, neither account is your long-term answer, but the SEP adjusts more easily.

Notice what is not on that list: lower taxes. The SEP does not save you more than a Solo 401(k) at any income. You pick a SEP for simplicity and timing, not for tax savings.

5.The Timing Rule That Catches People Who Switch

The one place the Solo 401(k) causes trouble is timing. It is worth getting right, because the rule changed recently.

For a Solo 401(k) you already have open, you generally have to choose your worker contribution by December 31 of the tax year. The boss part can be funded later, up to your filing deadline with extensions. But the $24,500 worker contribution has to be decided before the year ends. If you wait until April to set everything up, you lose the worker contribution for the prior year. That is the exact piece that made the account worth choosing.

6.The One Number That Decides It

Answer a single question: is your net profit far enough below the mid-six-figures that the worker contribution still has room to work? For the large majority of freelancers, the answer is yes, and the choice is simple.

1. Net profit under roughly $300K and you want the biggest deduction. Open the Solo 401(k). The worker contribution cuts your tax bill in a way the SEP simply cannot match.
2. You are at the deadline with no plan open for last year. The SEP buys you time, since you can still open and fund it before you file. Use it this year, then switch to a Solo 401(k) before next December.
3. You are about to hire W-2 staff. Neither solo account fits. Talk to a provider about a SIMPLE IRA (a simpler small-business retirement plan) or a small-business 401(k) before you put in another dollar.

The retirement account is one piece of a freelancer's tax picture. It pairs with the question of how to set up your business, which most people worry about first. If you are still deciding whether to stay a sole proprietor or form an LLC, the deduction limits here are the same either way, which is covered in Sole Prop or LLC? What Actually Changes for Freelancers.

How much you can actually shelter depends on your net profit. And your net profit depends on numbers most freelancers only see in April. If you want to know what your federal and state tax picture looks like before you decide how much to put away, the free tax checkup at simplance.org/tax-checkup runs the numbers in about a minute.

Pick the account that fits your income, not the one your brokerage puts on the front page. For most freelancers earning a real living, that is the Solo 401(k), and the difference is worth thousands every year.