A solo consultant with $140,000 of Schedule C profit and no employees can contribute $28,000 to a SEP IRA, $35,500 to a Solo 401(k) with the same profit (and up to $69,000 if profit were higher), or $16,000 plus a 3% match to a SIMPLE IRA — same business, same income, three materially different deductions and three different deadlines. Add one part-time employee working 800 hours and the Solo 401(k) may be off the table, the SEP must cover the employee too, and the SIMPLE's mandatory contribution changes the math entirely. The right plan is not the one with the highest headline limit; it is the one that matches employees, cash flow, and the owner's age.
For solo owners and micro-employers choosing between the three most common plans — Simplified Employee Pension (SEP IRA), Solo 401(k) (one-participant 401(k)), and SIMPLE IRA — the 2026 decision turns on four questions: Do you have employees (or will you soon)? How much do you want to contribute at your profit level? When must the money be in? And what paperwork and nondiscrimination testing are you willing to live with?
This guide compares the three on 2026 limits, deadlines, employee coverage, and tax math, with the modeling you need before you fund the wrong account.
The Three Plans at a Glance
SEP IRA
- Who it fits: Self-employed and small businesses with or without employees, where the owner wants simplicity and a single employer contribution.
- Contribution: Employer only, up to 25% of compensation, capped at $70,000 for 2025 (2026 indexed higher — likely $71,000–$72,000; IRS has not yet published 2026 COLA at this writing) — but for self-employed, compensation is net earnings after the deductible portion of SE tax and after the contribution itself, so the effective rate on Schedule C profit is about 18.59%, not 25%.
- Employees: If you have eligible employees (generally age 21+, worked for you in 3 of the last 5 years, earned $750+ in the year — 2025 threshold, 2026 indexed), you must contribute the same percentage for them as for yourself. One employee at 25% can dwarf the owner's tax benefit.
- Deadline: Establish and fund by the tax return due date including extensions (April 15 / October 15 for calendar-year filers). You can decide after year-end.
- Testing and Form 5500: No annual nondiscrimination testing; no Form 5500 for the SEP itself (the IRA custodian reports).
- Loans and Roth: No participant loans; no Roth SEP contributions in the classic sense (SECURE 2.0 created Roth SEP/ SIMPLE designations, but adoption and custodial support remain limited — confirm with your provider).
Solo 401(k) (One-Participant 401(k))
- Who it fits: Owner-only businesses — sole proprietor, single-member LLC, or S-corp with no common-law employees other than a spouse. The moment you have a non-spouse employee who meets the eligibility you define (often age 21 and 1,000 hours in a year), you generally outgrow the Solo 401(k) and need a traditional 401(k).
- Contribution: Two pieces — employee elective deferral up to $23,500 for 2025 (plus $7,500 catch-up at 50+, plus a $3,750 super catch-up at 60–63 under SECURE 2.0) and employer profit-sharing up to 25% of compensation (20% effective for self-employed; 25% for S-corp W-2). Combined, capped at $70,000 (or $77,500 at 50+, $81,250 at 60–63) for 2025 — 2026 COLA will be slightly higher. The deferral lets you hit the cap at lower profit than a SEP.
- Deadline: Establish by December 31 of the year you want the elective deferral to count for (SECURE 2.0 allows a sole proprietor to open by the tax filing deadline and still make employer contributions, but the deferral technically requires the plan to exist during the year — don't wait until April to open and expect a prior-year deferral). Fund elective deferrals during the year; fund profit-sharing by the return due date including extensions.
- Testing and Form 5500: No nondiscrimination testing while owner-only; Form 5500-EZ required when assets exceed $250,000 (or upon termination, regardless of assets). Must file annually once over threshold — a commonly missed filing.
- Loans and Roth: Participant loans permitted (up to 50% to $50,000 under plan terms); Roth elective deferrals available and increasingly common, plus qualified charitable distributions are not relevant here but Roth basis tracking matters for the ledger.
SIMPLE IRA
- Who it fits: Businesses with 100 or fewer employees who earned $5,000+ in the prior year, where the owner wants a low-cost salary-deferral plan without 401(k) administration and is willing to make mandatory employer contributions.
- Contribution: Employee deferral up to $16,500 for 2025 (plus $3,500 catch-up at 50+, plus $3,850 super catch-up at 60–63; 2026 COLA modestly higher) plus mandatory employer — either a 3% match of compensation (can be reduced to 1% in 2 of 5 years) or a 2% nonelective to all eligible employees. The mandatory piece is the cost of simplicity.
- Employees: Eligibility generally age 21 is not required — earned $5,000 in any 2 prior years and expected to earn $5,000 in the current year — a lower bar than SEP/Solo 401(k). More employees become eligible faster.
- Deadline: Establish by October 1 of the year (later for a new business after October 1 formed). Contributions funded during/after the year but deferrals must be from payroll during the year.
- Testing and Form 5500: No nondiscrimination testing; generally no Form 5500. But the 2-year 25% early-distribution penalty window applies — distributions within 2 years of first participation face 25% (not 10%) early-withdrawal penalty.
Contribution Math at the Same Profit — Where Solo 401(k) Wins for Owner-Only
Take a sole proprietor, age 45, no employees, 2025 limits (2026 will be slightly higher, the ordering doesn't change):
At $70,000 Schedule C profit (net after SE-tax adjustment ≈ $65,100):
- SEP: ≈ $12,100 (18.59% effective) — you need higher profit to hit the cap.
- Solo 401(k): $23,500 deferral + ≈ $12,100 profit-sharing = $35,600, capped by profit + deferral interplay — nearly 3× the SEP at this profit level.
- SIMPLE: $16,500 deferral + 3% match on the lower of profit/compensation ≈ ≈ $18,450 — deferral plus small match, but below Solo 401(k).
At $140,000 profit:
- SEP: ≈ $26,000
- Solo 401(k): $23,500 + employer piece capped so total hits $49,500 (still under the $70,000 cap) — the deferral advantage persists but narrows.
- SIMPLE: ≈ $16,500 + match ≈ $20,700
At $250,000 profit:
- SEP: Capped at $70,000 (25% of compensation hits the dollar cap) — SEP catches up.
- Solo 401(k): Also capped at $70,000 — both hit the same ceiling; Solo 401(k) got there sooner at lower profit, SEP needs that profit level to max.
Add catch-up: at 52, Solo 401(k) adds $7,500 more that SEP cannot; at 61, it adds $3,750 more on top. For owners 50+ who want to maximize deductible savings per year of remaining work, Solo 401(k) is often decisively larger.
S-corp nuance: The 25% employer limit applies to W-2 wages, not to pass-through profit directly. An S-corp owner with $100,000 W-2 and $80,000 K-1 distribution can base employer contributions on the $100,000 W-2 only — lower than the Schedule C base at the same economic income. The deferral still helps, but the K-1 distribution is not compensation for plan purposes.
Employees Change Everything — The Coverage Decision
If you have, or will soon have, a non-spouse employee:
- Solo 401(k) is generally out. The plan must convert to a traditional 401(k) with nondiscrimination testing, safe-harbor considerations, and — for most providers — higher fees. If you expect to hire within 12 months, don't open a Solo 401(k) you will immediately need to restate.
- SEP requires the same percentage for eligible employees. A 20% SEP contribution that is $28,000 for you is 20% for each eligible employee — a $10,000 cost for a $50,000 employee. That uniformity is why SEPs are most attractive for owner-only or for businesses where the owner is comfortable with that cost.
- SIMPLE requires the mandatory match/nonelective for every eligible employee and has the lower eligibility bar ($5,000 in 2 of 5 years). It is inclusive by design — which is a benefit for employees and a cost for the owner. But it avoids the SEP's "same percentage" leverage and avoids 401(k) testing.
Decision shortcut:
- No employees, ever: Solo 401(k) usually maximizes deduction at a given profit, with Roth and loan flexibility. SEP is simpler but smaller at modest profit.
- One part-time or seasonal employee at 600 hours: Solo 401(k) may still work if your eligibility is 1,000 hours — the employee may not be eligible — but verify before you assume. SEP at the 3-of-5-years rule may also exclude that employee for a few years.
- One or more regular employees: Compare full cost — SEP uniform percentage × eligible payroll vs. SIMPLE mandatory 3% match/2% nonelective × eligible payroll vs. traditional 401(k) safe-harbor cost. Don't compare only the owner's deduction.
Deadlines and the "I Forgot" Risk
The deadline that matters is the one you miss:
- SEP: You can open and fund by October 15 (extended return) and still count for the prior year — the most forgiving deadline. This is why SEPs are the go-to late decision. You cannot, however, make a prior-year employee deferral — there is no deferral in a SEP.
- Solo 401(k): Must generally be established by December 31 to make an elective deferral for that year. The employer profit-sharing can be funded by the extended return deadline, but the deferral opportunity closes with the calendar year. Missing December 31 is the single most common Solo 401(k) mistake for first-year owners.
- SIMPLE: Must be established by October 1 (or as soon as administratively feasible for a business formed after October 1). Fund deferrals from payroll during the year. Discovering SIMPLE in December for the current year is often too late.
Calendar them now: October 1 (SIMPLE), December 31 (Solo 401(k) establishment), April 15 / October 15 (SEP and Solo 401(k) profit-sharing funding).
A Close That Fits Year-End
October: Confirm headcount and hours for the next 12 months — will you stay owner-only? If not, stop optimizing for Solo 401(k) and compare SEP vs. SIMPLE vs. safe-harbor 401(k) on total employer cost.
December 31: If Solo 401(k) is the choice, the plan must exist by today for the deferral to count. Elective deferrals should be funded from compensation during the year, not as an afterthought in April.
January–April: Fund employer contributions by the return due date. Reconcile plan contributions to the ledger and to W-2 Box 12 codes (D, S, AA, etc.) — mismatches between payroll, the GL, and the plan statement are the most common filing-season scramble.
The Bookkeeping Connection
Retirement contributions are not a single annual entry but a system: compensation by entity, hours by employee, eligibility by plan, deferral vs. employer share, and deadline discipline. When profit, W-2, hours, and plan contributions live in the same version-controlled ledger, the story from "$140,000 of profit, no employees, age 45" to "$23,500 deferral + $12,100 profit-sharing = $35,600 Solo 401(k), established December 12, funded April 3, Form 5500-EZ not yet required" is traceable and explainable to a preparer who must get both the deduction and the deadline right.
Simplify Your Financial Management
The right retirement plan is a compensation and headcount decision before it is an investment decision. Beancount.io gives you plain-text, version-controlled accounting where profit, wages, hours, and plan contributions stay explicitly linked — no hidden spreadsheets, no vendor lock-in, and AI-ready when you want help turning this year's profit into next year's limit. Get started for free and make the deduction match the year you earned it.