Both the Solo 401(k) and SEP IRA are tax-deferred retirement accounts designed for self-employed individuals with no full-time employees (other than a spouse). Both offer large contribution limits and tax deductions that reduce your current-year bill. But they have meaningfully different contribution structures — and the difference matters most at lower and middle incomes where the Solo 401(k) almost always wins.
The key structural difference
SEP IRA — employer contributions only
You contribute as the "employer" up to 25% of net self-employment earnings (net SE income minus the deductible half of SE tax). Maximum contribution for 2025: $70,000. There is no employee contribution component. This means your contribution is capped at a percentage of income — at lower incomes, the dollar amounts are modest.
Solo 401(k) — employee + employer contributions
You can contribute as both the "employee" and the "employer." The employee portion: up to $23,500 in 2025 (plus a $7,500 catch-up if you're 50+). The employer portion: up to 25% of net SE earnings on top of that. Same overall cap: $70,000 for 2025 ($77,500 with catch-up). The employee contribution is what gives the Solo 401(k) its advantage — it's a flat dollar amount regardless of income.
Contribution comparison at 6 income levels
The table below uses 2025 limits and assumes a sole proprietor with no employees, filing as single. "Net SE income" is Schedule C profit minus the deductible half of SE tax. The Solo 401(k) employer contribution uses the same 25%-of-net-SE-earnings formula as the SEP IRA.
| Net SE income | SEP IRA max | Solo 401(k) max | Difference |
|---|---|---|---|
| $30,000 | $5,580 | $29,080 | +$23,500 |
| $50,000 | $9,300 | $32,800 | +$23,500 |
| $75,000 | $13,950 | $37,450 | +$23,500 |
| $100,000 | $18,587 | $42,087 | +$23,500 |
| $150,000 | $27,881 | $51,381 | +$23,500 |
| $250,000 | $46,468 | $69,968 | +$23,500 |
The pattern is clear: the Solo 401(k) lets you contribute the employee elective deferral ($23,500) on top of the same employer contribution available in a SEP IRA. At $30,000 net income, the Solo 401(k) allows more than five times the contribution. At $250,000, both accounts approach the overall cap, but the Solo 401(k) still leads by the full employee deferral amount.
Tax savings comparison
Every dollar contributed to either account reduces your taxable income dollar-for-dollar. Here's what the contribution difference means in actual tax savings (assuming a 22% marginal federal rate plus 15.3% SE tax on the employee deferral):
| Net SE income | Extra contribution (Solo 401k) | Additional tax savings |
|---|---|---|
| $30,000 | $23,500 | ~$5,170 (income tax) |
| $50,000 | $23,500 | ~$5,170 |
| $75,000 | $23,500 | ~$5,170 |
| $100,000 | $23,500 | ~$5,640 (enters 24% bracket) |
Note: the Solo 401(k) employee deferral reduces income tax but not self-employment tax. SE tax is calculated on Schedule SE before retirement contributions. Employer contributions in both plans reduce the net SE income used for the calculation, but the employee deferral in a Solo 401(k) does not.
When the SEP IRA makes more sense
Despite the Solo 401(k)'s contribution advantage, the SEP IRA wins in a few specific situations:
- You want simplicity. A SEP IRA can be opened and funded in minutes at Fidelity, Schwab, or Vanguard. No plan document, no annual filing (Form 5500-EZ), no administration. A Solo 401(k) requires a written plan document and — once assets exceed $250,000 — an annual Form 5500-EZ filing with the IRS.
- You're opening an account at the last minute. A SEP IRA can be established and funded up to your tax filing deadline (including extensions). A Solo 401(k) must be established by December 31 of the tax year — though you can fund it until the filing deadline.
- You already max out at high income. If your net SE income is high enough that 25% of earnings exceeds the employee deferral advantage, the gap narrows. At very high incomes ($280,000+), both accounts hit the same $70,000 cap.
When the Solo 401(k) is clearly better
- Your net income is under $150,000. The employee deferral gives you dramatically more contribution room. This is the income range where most freelancers operate, and where the Solo 401(k) shines brightest.
- You want a Roth option. Many Solo 401(k) providers allow Roth (after-tax) employee contributions. SEP IRAs are always pre-tax. If you want to build a tax-free retirement bucket, Solo 401(k) is the only option.
- You want loan access. Solo 401(k) plans can include a loan provision (up to $50,000 or 50% of balance). SEP IRAs do not allow loans — any withdrawal before 59½ triggers taxes and a 10% penalty.
- You want to do a backdoor Roth IRA. SEP IRA balances complicate the backdoor Roth conversion (pro-rata rule). A Solo 401(k) doesn't — it's a separate plan type that doesn't trigger the pro-rata issue.
How to open each account
SEP IRA
Open one at Fidelity, Schwab, or Vanguard in about 15 minutes online. You'll fill out IRS Form 5305-SEP (a one-page document the provider handles). Fund it any time before your tax filing deadline. No annual IRS reporting required regardless of balance size.
Solo 401(k)
Providers: Fidelity, Schwab, and Vanguard all offer free Solo 401(k) plans. You'll adopt a plan document provided by the custodian. The plan must be established (paperwork completed) by December 31 of the year you want to make contributions for — though you can fund it until your tax filing deadline. Once plan assets exceed $250,000, you'll file IRS Form 5500-EZ annually (a simple one-page form).
If simplicity is your top priority, you're opening at the last minute (after December 31), or your income is above $280,000, the SEP IRA is a perfectly good choice.
Can you have both?
Yes — but the combined employer contributions across both plans cannot exceed the 25%-of-net-SE-earnings limit. In practice, having both usually doesn't increase your total contribution room and adds unnecessary complexity. Pick one.
For a deeper look at how retirement contributions reduce your quarterly tax payments, see our quarterly tax guide. For the full list of deductions that reduce the income you're saving from, see every self-employed deduction.