What is the difference between a SEP-IRA and a Solo 401(k)?

A SEP-IRA lets you contribute as the 'employer' only — up to 25% of your net self-employment earnings, up to an annual cap. A Solo 401(k) adds an 'employee' salary-deferral contribution on top of the employer piece, so at the same income you can usually contribute more. The Solo 401(k) also offers a Roth option and, often, plan loans, while a SEP-IRA is simpler to set up and administer.

Which lets me contribute more, SEP-IRA or Solo 401(k)?

At lower and moderate incomes, the Solo 401(k) usually wins because its employee deferral lets you set aside a large fixed amount before the percentage-based employer piece even starts. At very high self-employment income the two converge near the same overall annual limit. Always check the current year's IRS dollar limits.

Do retirement contributions reduce self-employment tax?

No. SEP-IRA and Solo 401(k) contributions reduce your income tax as an adjustment to income, but they do not reduce the 15.3% self-employment tax, which is calculated on your net earnings before these contributions.

Can I have a Solo 401(k) if I have employees?

A Solo 401(k) is designed for an owner (and a spouse) with no other full-time employees. Once you hire eligible employees, you generally can't use a one-participant 401(k) and would need a different plan. A SEP-IRA can cover employees but then generally requires you to contribute for them too.

Can I open one of these and a regular IRA?

Generally yes — you can contribute to a SEP-IRA or Solo 401(k) and still contribute to a traditional or Roth IRA, though your IRA deduction may be limited at higher incomes because you're considered covered by a workplace plan. Confirm the current rules and limits before contributing.

SEP-IRA vs Solo 401(k): retirement for the self-employed

Nobody's enrolling you in a 401(k) anymore — but as a freelancer you actually get better retirement options than most employees, with bigger contribution room and a fat income-tax deduction. The two front-runners are the SEP-IRA and the Solo 401(k). Here's how they differ and how to choose.

Last reviewed: June 2026 · Dollar limits change yearly — verify the current figures (see Sources)

The quick answer

Both let you put pre-tax money away for retirement and deduct it from your income tax. The difference is how much you can contribute and how flexible the plan is:

SEP-IRA: dead simple. You contribute as the "employer" — up to about 25% of your net self-employment earnings, capped at an annual dollar limit. Easy to open, almost no paperwork.
Solo 401(k): more powerful. You contribute as both "employee" (a salary deferral up to the annual 401(k) limit) and "employer" (up to ~25%). The two stack, so at the same income you can usually sock away more.

Why the Solo 401(k) usually wins on contribution room

The Solo 401(k)'s edge is the employee deferral: you can contribute a large fixed amount straight off the top before the percentage-based employer piece even starts. That matters most at low-to-moderate income, where 25% of profit alone wouldn't add up to much.

Example of the idea: on $60,000 of net profit, a SEP-IRA caps you near ~$12,000 (roughly 20% of net after the SE-tax adjustment). A Solo 401(k) lets you add a much larger employee deferral on top of that same employer amount — potentially several times the SEP contribution. At very high income, the two converge near the same overall annual cap.

(Exact dollar limits change every year, so check the current IRS figures linked below before you fund either one.)

Where the SEP-IRA still shines

Simplicity. You can open one at most brokerages in minutes, with no annual filing in typical cases.
Late funding. You can set one up and fund it for the prior year up to your tax deadline (including extensions) — handy when a profitable year surprises you.
No deferral bookkeeping. One employer contribution, done.

Where the Solo 401(k) pulls ahead

Bigger contributions at most income levels, thanks to the deferral.
A Roth option in many plans — pay tax now, withdraw tax-free later.
Catch-up contributions if you're 50 or older.
Plan loans are often allowed (a SEP-IRA can't lend to you).

The trade-off: a Solo 401(k) has a bit more setup and, once it grows past a threshold, an annual information return. It's also for owner-only businesses — hiring full-time employees changes the picture.

One thing neither does

Contributions to either plan reduce your income tax but not your self-employment tax — the 15.3% is figured on your earnings before these contributions. They're still one of the best deductions a freelancer has; just know the limit. For how they fit with your other write-offs, see the deduction checklist.

See what a contribution saves you in tax

Retirement contributions lower your taxable income — and your quarterly payments. Add a SEP-IRA or Solo 401(k) contribution in our free Quarterly Tax Estimator and watch your estimated tax drop in real time. Nothing leaves your browser.

Estimate my tax savings →

Frequently asked questions

What's the difference between a SEP-IRA and a Solo 401(k)?: A SEP-IRA is an employer-only contribution (up to ~25% of net earnings); a Solo 401(k) adds an employee salary deferral on top, so you can usually contribute more. The Solo 401(k) also offers Roth and loans; the SEP is simpler.
Which lets me contribute more?: Usually the Solo 401(k) at low-to-moderate income, because of the deferral. At very high income they converge near the same overall cap.
Do contributions reduce self-employment tax?: No — they reduce income tax only. SE tax is figured before these contributions.
Can I have a Solo 401(k) with employees?: It's for owner-only businesses (plus a spouse). Hiring eligible full-time employees generally means switching plans.
Can I also fund a regular IRA?: Usually yes, though your traditional IRA deduction may phase out at higher income since you're covered by a workplace plan. Check current limits.