$24,500 Is the Whole Difference: Solo 401(k) or SEP IRA on the 2026 Numbers

For a self-employed person with no employees, the solo 401(k) and the SEP IRA compute the employer contribution identically: 20% of net earnings from self-employment. The entire difference is that a solo 401(k) also lets you make an employee deferral, which is $24,500 in 2026, on top. At $100,000 of Schedule C profit that is roughly $18,600 into a SEP against roughly $43,100 into a solo 401(k). The catch is timing: a SEP can be opened right up to your filing deadline including extensions, while a solo 401(k) generally cannot be, and the deferral has to be elected before the year ends.

All figures below are US federal rules for the 2026 tax year, checked against IRS pages on 28 July 2026. This is not tax advice, and the arithmetic changes if you have employees or a second job with a workplace plan.

The 2026 numbers you actually need

From the IRS announcement of Notice 2025-67 and the cost-of-living table:

• Employee deferral limit: $24,500 (was $23,500)
• Catch-up at 50 and over: $8,000. At ages 60 to 63: $11,250
• Total additions to one account, the section 415(c) cap: $72,000 (was $70,000)
• Compensation that can be counted: $360,000
• IRA limit, separate from all of the above: $7,500, plus $1,100 at 50 and over

Where the 20% comes from

Plan documents say 25% of compensation. For a self-employed person that reads differently, because your own contribution and half of your self-employment tax both reduce the compensation figure the percentage applies to. The IRS resolves the circularity with a rate table in Publication 560, where a 25% plan rate becomes 20% of net earnings. The one-participant 401(k) page defines the base: earned income is net earnings from self-employment after deducting both one-half of your self-employment tax and contributions for yourself.

Self-employment tax is 15.3%, made of 12.4% for Social Security and 2.9% for Medicare, and it applies to 92.35% of net earnings, per the IRS topic page. Half of it is deductible. Our arithmetic, at two profit levels:

Two checks on those totals. Both stay under the $72,000 cap, so it is not binding here. And the deferral cannot exceed your earned income after the employer contribution, which at $50,000 of profit is $37,174, comfortably above $24,500. Below roughly $32,000 of profit that test starts to bite, and the deferral is what shrinks.

Both examples also sit below the Social Security wage base, so the full 15.3% applies. Above the wage base the Social Security portion stops and only the 2.9% Medicare part continues, so the half-deduction is smaller than a straight 15.3% and the whole table has to be rerun. The IRS page we opened states the 2024 base and not a 2026 figure, so look it up on your own Schedule SE rather than scaling ours.

The deadlines, which usually decide it

This is the part that turns a comparison into a single answer, depending on what month you are reading in.

• SEP IRA: establish and fund it by your tax return due date, including extensions. That is the reason the SEP exists in most people's lives: it is the plan you can still open in October for last year.
• Solo 401(k), the employer part: a qualified plan is generally adopted by the employer's tax filing due date including extensions, and since 2023 a sole proprietor with no employees can adopt a 401(k) after the tax year ends provided it is adopted by the filing deadline without extensions.
• Solo 401(k), the deferral: Publication 560 is specific. A sole proprietor's deferrals "must be elected by the end of the tax year and can then be made by the tax return filing deadline, including extensions." Miss 31 December and the $24,500 that made the plan worth choosing is gone for that year, even if the plan itself is still adoptable.

So the practical calendar for a 2026 contribution: elect the deferral in writing before 31 December 2026, adopt the plan by the unextended 2027 filing deadline at the latest, and fund everything by the filing deadline with extensions. If you are reading this in a year that has already closed, the SEP is your only door.

Choosing

A rule that covers most solo situations:

• Profit under about $30,000, and you want to save most of it. Solo 401(k). The deferral is what lets you contribute a large share of a small income; 20% of net earnings on its own is a rounding error.
• Profit $30,000 to $360,000, no employees, decision made before year end. Solo 401(k). Same employer maths as the SEP, plus $24,500, and a Roth option at most providers.
• You are past 31 December and want a deduction for the closed year. SEP IRA. It is the only one of the two you can still open and elect.
• You expect to hire this year. Think twice about the solo 401(k). Once employees meet the eligibility rules they must be included and deferrals become subject to nondiscrimination testing unless the plan is a safe harbour design, which is a different plan with different costs.
• You want to backdoor a Roth conversion later. A SEP IRA is an IRA and counts in the pro-rata calculation across all your traditional IRA balances; a solo 401(k) balance does not. That single fact reverses the decision for some people.

The paperwork that arrives later

A solo 401(k) is silent for years and then is not. Once the plan holds $250,000 or more in assets at the end of a year, it generally has to file Form 5500-EZ annually. There is no equivalent filing for a SEP. It is not a reason to avoid the better plan, but it is a cost that shows up around the time the account is big enough to matter, alongside the other annual admin a solo business accumulates: the contractor forms, the insurance decisions, the payout rails. Put the 31 December deferral election in your calendar now. It is a five-minute task that is worth $24,500 of contribution room, and it is the only part of this that expires.