SEP IRA vs solo 401(k) for freelancers in 2026

What are the 2026 contribution limits?

The IRS announced the 2026 retirement plan limits in Notice 2025-67. These are the figures that matter for a freelancer comparing the two plans.

How each plan works

SEP IRA: employer contributions only

A simplified employee pension lets your business contribute to an IRA in your name. There is no employee deferral. For a sole proprietor, the plan rate is up to 25%, but because your own contribution is itself a deduction, the effective rate on your earnings is 20%. Publication 560 calls this the rate for self-employed people.

The base is net profit minus the deductible half of self-employment tax. So the steps are: figure SE tax, subtract half of it from net profit, and multiply by 20%.

Solo 401(k): two kinds of contributions

A one-participant 401(k), often called a solo 401(k), covers a business owner with no employees (a spouse who works in the business can also participate). You contribute in two roles:

1. As the employee: an elective deferral of up to $24,500, or up to 100% of your compensation if that is less. Catch-up contributions apply if you are 50 or older.
2. As the employer: a profit-sharing contribution figured the same way as the SEP, 20% of net profit minus half of SE tax.

The total of both, excluding catch-ups, cannot exceed $72,000. Because the deferral is not tied to a percentage, a solo 401(k) lets you put away much more at low and middle incomes.

Worked comparison: $60,000 and $150,000 of net profit

Both examples assume a sole proprietor under age 50 with no other job and no employees.

At $60,000 of profit, the solo 401(k) allows more than three times the SEP amount. At $150,000 the gap narrows but is still the full $24,500 deferral. Neither example reaches the $72,000 cap. A SEP IRA catches up with a solo 401(k) only at much higher incomes, where 20% of earnings alone approaches the $72,000 limit.

These are maximums, not targets. Contributions lower your income tax and your QBI deduction at the same time, and they do not change your self-employment tax.

Deadlines

• SEP IRA: you can set up the plan and make contributions for a year as late as the due date of your return, including extensions.
• Solo 401(k) setup: a sole proprietor with no employees can adopt a 401(k) for a year after the year ends, as long as it is adopted by the tax filing deadline, not counting extensions.
• Solo 401(k) contributions: employer profit-sharing contributions can be made up to the return due date, including extensions. Employee deferral elections have their own timing rules, so confirm them with your plan provider before year end.

Paperwork

A SEP IRA is simple. You adopt a written plan, often the IRS model Form 5305-SEP, and open a SEP IRA at a financial institution. There is no annual IRS filing for the plan.

A solo 401(k) needs a plan document, usually from the provider, and more recordkeeping. Once plan assets exceed $250,000 at the end of a plan year, you must file Form 5500-EZ for that year. A Form 5500-EZ is also required for the plan's final year, whatever the balance.

Roth options

Under the SECURE 2.0 Act, a SEP can let you designate contributions as Roth, so they go in after tax and qualified withdrawals come out tax-free. Not every provider offers this yet.

Many solo 401(k) plans allow designated Roth deferrals, and SECURE 2.0 also permits employer contributions to be designated as Roth if the plan allows it. Roth contributions give you no deduction now, so they do not reduce your current income tax or your quarterly payments.

Common mistakes

• Using 25% instead of 20%. The 25% plan rate applies to employees' pay. For your own contribution as a sole proprietor, the effective rate on net profit minus half of SE tax is 20%.
• Skipping the SE tax adjustment. The 20% applies after subtracting the deductible half of self-employment tax, not to your full net profit.
• Deferring more than you earned. The $24,500 employee deferral cannot exceed your compensation from the business, which matters in a low-profit year.
• Forgetting Form 5500-EZ. A solo 401(k) that crosses $250,000 in assets needs an annual filing, and late filing penalties can be significant.

Which fits which situation

The math favors a solo 401(k) whenever you want to save more than about 20% of your earnings, especially at lower profit levels. A SEP IRA trades a lower ceiling for less paperwork and a later setup deadline. If you have or plan to hire employees, both plans change significantly, because employees generally have to be covered too. That is the point to bring in a tax professional or plan provider.

To see how a contribution changes your tax bill, start with the self-employment tax calculator, then adjust your payments with the quarterly estimated tax calculator. The freelance rate calculator can include retirement savings in the rate you charge.