Retirement Accounts for the Self-Employed: SEP-IRA vs Solo 401(k) vs SIMPLE IRA
If you have no employees, the Solo 401(k) almost always shelters the most — often two to three times a SEP-IRA at the same profit, because it adds a salary deferral on top of the identical employer contribution. Every plan here cuts your income tax. None of them touch the 15.3% self-employment tax. Start with your number.
Contribution Limit Calculator
Prefilled with an $80,000 net-profit contractor filing single. Enter your own Schedule C net profit to see what each plan allows and what the deduction is worth.
Your Contribution Limits
Gross self-employment income minus business expenses
Sets the bracket your deduction comes off the top of
Maximum Solo 401(k) Contribution
$37,870
Saves roughly $5,804in federal income tax — $23,000 more shelter than a SEP-IRA at the same profit
Solo 401(k)
$37,870
Deferral + employer contribution
−$5,804 income tax
SEP-IRA
$14,870
Employer contribution only
−$3,044 income tax
SIMPLE IRA
$18,230
Deferral + 3% self-match
−$3,447 income tax
How the Limit Is Built
Net Profit
Schedule C, line 31
Less Half of SE Tax
Total SE tax $11,304÷ 2
Net Earnings from Self-Employment
Every limit below is a percentage of this
Employer Contribution (20%)
Available in both the SEP-IRA and the Solo 401(k)
Employee Deferral (Solo 401(k) only)
Capped at $23,000, and at your net earnings
Solo 401(k) Maximum
Federal Income Tax Saved
Deduction comes off the top of your 22% bracket
Self-Employment Tax Saved
Retirement contributions never reduce the 15.3%
Reading These Numbers
Why 20% and not 25%?The employer contribution is 25% of compensation, but a sole proprietor's compensation is itself reduced by the contribution. Solving the circle gives 0.25 / 1.25 = 20% of net earnings.
The deferral is what separates the plans.A SEP-IRA is employer money only. A Solo 401(k) lets you also defer salary, which is why it wins at every profit level below the combined cap — and why the gap is widest at modest profits.
The 15.3% doesn't move. Self-employment tax is computed on Schedule C net profit, before the retirement deduction. Contributing cuts income tax only.
Estimates use 2024 plan-year limitsand ignore the QBI deduction, which shrinks as your contribution grows and trims the real saving somewhat. The IRS indexes every dollar figure here each fall — confirm the current year on irs.gov.
SEP-IRA vs Solo 401(k) vs SIMPLE IRA
All three are tax-deferred accounts a self-employed person can open at a brokerage. They differ in how much they let you put in, how much paperwork they demand, and what happens when you hire someone.
| SEP-IRA | Solo 401(k) | SIMPLE IRA | |
|---|---|---|---|
| Employer contribution | 20% of net earnings | 20% of net earnings | 3% match or 2% nonelective |
| Salary deferral | None | Yes, on top of the employer piece | Yes, at a lower limit |
| Roth option | Rarely offered | Commonly offered | Rarely offered |
| Can you borrow? | No | Yes, if the plan allows | No |
| With employees | Allowed, but you fund the same % for each | Not allowed, except a spouse | Designed for small staffs |
| Annual filing | None | Form 5500-EZ once assets top $250,000 | None |
| Setup deadline | Return due date, incl. extensions | Year end for deferrals | October 1 of the plan year |
| Early withdrawal | 10% penalty | 10% penalty | 25% in the first two years |
The SIMPLE IRA rarely wins for a solo contractor. Its deferral limit is meaningfully lower than a 401(k)'s, its employer piece is 3% rather than 20%, and the first-two-years withdrawal penalty is 25% instead of 10%. It exists to be cheap to run when you have a payroll, and that is where it belongs.
Why the Employer Contribution Is 20%, Not 25%
Every article on SEP-IRAs says the limit is 25% of compensation. Then you run the numbers on your own profit and get a smaller answer. Both are right, and the reason is a small piece of circular arithmetic.
For an employee, compensation is a fixed salary and the employer's 25% sits outside it. A sole proprietor is both parties, so the contribution reduces the very compensation the percentage is applied to. Solving the circle gives 0.25 ÷ 1.25 = 20%, applied to net earnings from self-employment. That base is your Schedule C net profit minus the deductible half of your self-employment tax — not gross receipts, and not net profit itself.
So the order of operations runs: net profit, subtract half your SE tax, take 20%. The calculator above walks each step. The same 20% figure and the same base drive the employer contribution in a SEP-IRA and in a Solo 401(k), which is precisely why the Solo 401(k)'s extra salary deferral is the only thing separating them.
What the Deduction Is Actually Worth to a 1099 Worker
Here is the part that surprises people, and it is worth being blunt about: a retirement contribution does not reduce your self-employment tax. Not by a dollar.
The 15.3% is computed on Schedule C net profit. Your own SEP-IRA or Solo 401(k) deduction is claimed on Schedule 1 of Form 1040, further down the return, after Schedule SE has already done its work. The contribution never passes through the business's profit figure, so it never reaches the 15.3%.
Ordinary business write-offs behave differently. Mileage, the home office, software, phone — those come off on Schedule C itself, lowering net profit before either tax is figured. A dollar of business expense therefore cuts income tax and the 15.3%. A dollar contributed to a retirement plan cuts income tax only.
| A dollar of... | Cuts income tax | Cuts SE tax | Where it's claimed |
|---|---|---|---|
| Business expense | Yes | Yes | Schedule C |
| Retirement contribution | Yes | No | Schedule 1 |
| Half of your SE tax | Yes | No | Schedule 1 |
None of that makes the contribution a bad deal — it is the largest deduction most contractors will ever take, and the money stays yours. But if your goal is shrinking the 15.3%, this is the wrong lever. The difference between SE tax and income tax is exactly the distinction doing the work here.
One further wrinkle worth knowing before you model the saving: the deduction for your own retirement contribution reduces qualified business income, so your QBI deduction shrinks as your contribution grows. The real-world saving is a little below the raw bracket math for anyone claiming QBI. The calculator above ignores this, which makes its estimate slightly optimistic rather than misleading.
Deadlines: What You Can Still Fix, and What You Can't
Three plans, three different answers to “can I still do this for last year?”
- SEP-IRA — yes, usually.You can open and fund one as late as your return's due date including extensions. This is the single best reason for a self-employed person to file an extension: it buys until October to fund last year's deduction. It does not work for a traditional IRA, Roth IRA, or HSA, all of which stay pinned to April 15.
- Solo 401(k) — partly.The plan can generally be adopted by your return's due date including extensions, which retroactively allows the employer contribution. Salary deferrals are the harder half: they normally require the plan and a deferral election to exist before the year closes, with a narrow first-year exception for sole proprietors. Set up the plan in December, not April.
- SIMPLE IRA — no. An existing business must generally establish it by October 1 of the year it takes effect. Once the year has ended there is nothing to salvage.
If you are reading this in the spring with a large balance due, the SEP-IRA is likely your only remaining move — and the deduction can be substantial enough to change what you owe. Model it against the number the set-aside calculator gives you.
Which One Should You Open?
- No employees, want the biggest deduction: Solo 401(k). The salary deferral is free shelter a SEP simply does not offer, and it matters most when profit is modest.
- You already max a 401(k) at a W-2 job: the deferral limit is per person, so it is already spent. The SEP-IRA and the Solo 401(k) will allow you roughly the same employer contribution — take the SEP for its simpler paperwork.
- It's April and you want a deduction for last year: SEP-IRA. It is the only one of the three you can still open and fund retroactively.
- You have eligible employees: the Solo 401(k) is off the table. A SEP means funding the same percentage for each of them; a SIMPLE IRA means a 3% match. Compare the payroll cost, not just your own limit.
- You want Roth treatment or a plan loan: Solo 401(k). Neither is available in a conventional SEP or SIMPLE.
Worth naming the trap: a Solo 401(k) stops being a Solo 401(k) the moment you hire an eligible employee. If you expect to hire within a year or two, the SEP-IRA's lower ceiling may still be the cheaper path.
Run Your Own Numbers
Every limit on this page is a percentage of net earnings, so the number to nail down first is net profit. The Schedule C calculator gets you there from gross receipts and expenses, the deduction estimator shows what your write-offs save on both taxes, and the side hustle tax calculator stacks self-employment profit on top of W-2 wages. Take the business deductions first — they cut the 15.3% too — then size the retirement contribution against what's left.
Educational only — not tax advice. Contribution limits, catch-up amounts, and the annual additions cap are indexed for inflation and change most years; the calculator above uses 2024 plan-year figures. Confirm the current numbers on irs.gov or with a CPA before contributing.
Frequently Asked Questions
Is a SEP-IRA or a Solo 401(k) better for a self-employed person?
For someone with no employees, the Solo 401(k) shelters more at nearly every profit level, and the gap is widest at modest incomes. Both let you make the same 20%-of-net-earnings employer contribution, but the Solo 401(k) also lets you defer salary on top of it. At $80,000 of net profit a SEP-IRA caps out near $14,900 while a Solo 401(k) allows roughly $37,900 — the difference is entirely the salary deferral. The SEP wins on simplicity: no plan document, no annual filing, and you can open and fund one right up to your extended return deadline. The two converge only at high profit, where the 20% employer piece alone reaches the combined annual limit.
Do retirement contributions reduce self-employment tax?
No, and this is the most common misunderstanding about these accounts. Self-employment tax is computed on your Schedule C net profit, and the deduction for your own SEP-IRA or Solo 401(k) contribution is taken further down the return, on Schedule 1 — after the 15.3% has already been calculated. So a $20,000 contribution cuts your federal income tax but leaves your SE tax exactly where it was. Ordinary business expenses like mileage and the home office are different: those come off Schedule C, so they cut both taxes. If your goal is reducing the 15.3%, deductions do it and retirement contributions do not.
How much can I contribute to a SEP-IRA if I'm self-employed?
20% of your net earnings from self-employment, which is your Schedule C net profit minus the deductible half of your self-employment tax. People often expect 25%, because that is the figure in the statute. The catch is that a sole proprietor's compensation is itself reduced by the contribution, and solving that circle turns 25% of compensation into 20% of net earnings. The result is also capped by the annual additions limit, which the IRS indexes each year.
Can I have a Solo 401(k) if I have a W-2 job with a 401(k)?
Yes, but the salary deferral limit is per person, not per plan. You get one elective deferral limit across every 401(k) you participate in, so if you have already maxed the deferral at your day job, you cannot defer anything into the Solo 401(k). What you can still do is make the employer profit-sharing contribution from your self-employment income — that is subject to its own per-plan limit and is unaffected by what your employer's plan did. Many people in this position find the SEP-IRA and the Solo 401(k) end up allowing the same amount, since the deferral is already spent.
When do I have to open and fund each account?
The SEP-IRA is the most forgiving: you can open and fund it as late as your tax return's due date including extensions, which means a valid extension buys until October to fund last year. The SIMPLE IRA is the least forgiving — an existing business generally must establish it by October 1 of the year it takes effect, so it is never a fix for a year that has already ended. The Solo 401(k) sits in between: the plan can generally be adopted by your return's due date including extensions for employer contributions, but salary deferrals normally require the plan and a deferral election to be in place before year end, with a narrow first-year exception for sole proprietors.
Can I still contribute if I have employees?
It changes which plan works. A Solo 401(k) is only for a business with no employees other than a spouse — hire someone eligible and you have an ordinary 401(k), with testing and filing obligations to match. A SEP-IRA permits employees, but you must contribute the same percentage of compensation for every eligible one that you contribute for yourself, which gets expensive fast. A SIMPLE IRA is built for small staffs and requires either a 3% match or a 2% nonelective contribution. Contractors who hire their first employee usually find their plan choice made for them.
Does a Solo 401(k) require an annual tax filing?
Only once it gets large. A one-participant plan must file Form 5500-EZ for any year in which total plan assets exceed $250,000 at year end, and in its final year regardless of size. Below that threshold there is no annual filing. A SEP-IRA never requires a Form 5500 at all, which is a real part of its appeal. The Solo 401(k) also carries a plan document you have to adopt and keep current, whereas a SEP is a single IRS form and a brokerage account.