Retirement plans for the self-employed

A solo 401(k) allows more than a SEP-IRA at every income, and far more at low income, because its employee deferral is a flat amount rather than a percentage. irs.gov

That is the reverse of how the choice is usually presented — “a SEP is simpler, a solo 401(k) is for people earning more” — and the reversal costs real contribution room to exactly the people who have least of it.

What each plan allows

Net profit	Net earnings	SEP-IRA	SIMPLE IRA	Solo 401(k)	Solo over SEP
$30,000	$27,881	$5,576	$17,836	$27,881	$22,304
$60,000	$55,761	$11,152	$18,673	$35,652	$24,500
$100,000	$92,935	$18,587	$19,788	$43,087	$24,500
$150,000	$139,403	$27,881	$21,182	$52,381	$24,500
$250,000	$235,213	$47,043	$24,056	$71,543	$24,500
$400,000	$383,205	$72,000	$27,800	$72,000	—

Maximum contribution by plan and net profit, from IRS Notice 2025-67 limits — single filer, no state income tax, tax year 2026, under 50. Generated from the same engine the calculators run, not typed in — every constant is listed with its source.

Three things in that table are worth stopping on.

The solo 401(k) wins everywhere, and wins biggest at the bottom. At $30,000 of profit a SEP allows about a fifth of net earnings; a solo 401(k) allows essentially all of it. The employee deferral is not a percentage of anything, so it does not shrink with income.

A SIMPLE beats a SEP for most of this audience. The two cross at about $107,600 of net profit, where both allow $20,000. Below that the SIMPLE’s flat deferral wins; above it, the SEP’s percentage does. The usual two-way framing leaves out the plan that is second best across most of the range.

At the top the choice stops mattering. Once net earnings reach $360,000 the contribution limit and the compensation limit bind together, and every plan lands on the same ceiling.

The percentage that is not the percentage

A SEP is described everywhere as 25% of compensation. For a sole proprietor the effective figure is 20% of net earnings, because the contribution comes out of the same earnings it is a percentage of.

The circle, solved

contribution = 25% × (net earnings − contribution)
             = 0.25 / 1.25 × net earnings
             = 20% of net earnings

Using the higher figure invents contribution room that does not exist, and the penalty for acting on it is an excise charge on the excess for every year it stays in the account. irs.gov The full arithmetic is on the deductions side, because the contribution is also the largest deduction most solo operators can claim.

What the deduction is worth

Less than the bracket suggests, and less the more you contribute. A contribution is an adjustment on Schedule 1, so it never reduces self-employment tax, and a large one walks you down through the brackets as it goes.

Band of contribution	Tax it saves	Return on that band	Saved so far
$0 – $5,000	$880.00	17.6%	$880.00
$5,000 – $15,000	$1,666.82	16.7%	$2,546.82
$15,000 – $25,000	$960.00	9.6%	$3,506.82
$25,000 – $35,000	$960.00	9.6%	$4,466.82
$35,000 – $43,087	$776.35	9.6%	$5,243.17

What each successive band of contribution saves at $100,000 of net profit — single filer, no state income tax, tax year 2026, under 50. Generated from the same engine the calculators run, not typed in — every constant is listed with its source.

The first band returns 17.6% and the top band 9.6%. That does not argue for contributing less — compounding is the reason to fund the account, not the deduction — but it does mean the tax case for the last tranche is weak enough that competing uses can beat it.

Your own numbers

Each quarterly payment

$3,486

Q1Apr 15, 2026$3,486.35
Q2Jun 15, 2026$3,486.35
Q3Sep 15, 2026$3,486.35
Q4Jan 15, 2027$3,486.36

Net profit: $75,000
Self-employment tax: $10,597
Federal income tax: $4,898
QBI deduction: −$10,720
Total for the year: $15,495
Effective rate on profit: 20.7%
What you keep: $59,505

State tax not included. State income tax for is not included in this figure. The federal number above is complete; your total liability will be higher by whatever charges. See which states are covered at /state-taxes/, or check your state's revenue department for its current rate. What this site covers, state by state.

Open the full calculator, with the working shown →

Everything in this cluster

The cluster is being built out. What exists now is the arithmetic; the plan-selection detail follows.

Retirement contributions as a deduction — what the contribution saves, and why the last dollar is worth barely half of the first
How the contribution limit is calculated — every line of it, and the four places it goes wrong
Solo 401(k) vs SEP-IRA vs SIMPLE — the room, and the rule that usually decides it before the room does
Retirement plan deadlines — three plans, three cut-offs, and a SIMPLE closes on 1 October
The backdoor Roth — why a SEP balance closes it and a solo 401(k) does not
What hiring does to your plan — a SEP makes you match your own rate, and yours is the highest in the business
The health insurance deduction — the other large adjustment, governed by the same rules

Where to stop and ask

Timing is the other half of the decision, and it does not wait for the return: a SIMPLE closes on 1 October, months before most people look.

If you have employees, a SEP requires proportional contributions for eligible staff and a SIMPLE requires a match. Both stop being cheap at that point, and the plan choice becomes a staffing decision rather than a tax one.

If you are also weighing an S-corp election, the two interact directly: the election changes what counts as compensation, which changes the base for every figure above.