A freelance developer earning $80,000 in net self-employment income can shelter roughly $43,000 from taxes this year in one retirement account — or just $18,570 in another. Same income, same tax bracket, two very different outcomes. The difference comes down to a single structural quirk between the two most popular retirement plans for the self-employed: the Solo 401(k) and the SEP IRA.
Most freelancers pick whichever one their bank or brokerage happens to offer first, without ever running the numbers. That's an expensive mistake. Here's how the two plans actually compare in 2026, and how to figure out which one puts more money in your pocket — and more of it working for you tax-deferred.
Why This Decision Matters More Than You Think
Only about 38% of self-employed workers are actively saving for retirement, and the ones who do save put away an average of just 8% of gross income — well under the 15% most advisors recommend. Independent workers, as a group, retire with roughly 40% less saved than employees with access to a workplace 401(k).
Part of the problem is access — there's no HR department auto-enrolling you into anything. But part of it is also confusion: SEP IRA, Solo 401(k), SIMPLE IRA — the acronyms blur together, and picking the wrong one can mean leaving tens of thousands of dollars in unused tax-advantaged space on the table every single year.
If you're a solo developer, consultant, designer, or any other one-person business with no full-time employees (a spouse on payroll is fine), this decision is worth an afternoon of your time.
The Core Difference: One or Two Contribution Buckets
Both plans let you shelter self-employment income from current-year taxes and grow it tax-deferred until retirement. The mechanics of how you get money in are where they diverge.
SEP IRA: You can only make one type of contribution — an "employer" contribution, capped at 25% of your compensation (in practice, closer to 20% of net self-employment income once you account for the self-employment tax deduction, which is explained below). There's no separate employee-deferral bucket.
Solo 401(k): You get two contribution buckets that stack on top of each other:
- Employee deferral — up to $24,500 in 2026 (or $32,500 if you're 50 or older, and $35,750 if you're between 60 and 63, thanks to the SECURE 2.0 "super catch-up"). This comes off the top of your compensation, dollar for dollar, regardless of how much you earn.
- Employer contribution — the same roughly 20–25% of compensation math as the SEP IRA.
Because the employee-deferral bucket isn't tied to a percentage of income, it's what makes the Solo 401(k) dramatically better for people who haven't yet reached six-figure self-employment income.
Running the Numbers
Let's go back to that $80,000 net self-employment income example (after the deduction for half of your self-employment tax):
SEP IRA: 20% of $80,000 ≈ $18,570 total contribution.
Solo 401(k):
- Employee deferral: $24,500
- Employer contribution: ~20% of the remaining compensation base ≈ $18,570 (roughly the same employer-side math as the SEP)
- Total: ~$43,070
That's a swing of roughly $24,500 — the entire employee deferral — for identical income. At higher income levels the gap narrows, because both plans converge toward the same 2026 combined ceiling of $72,000 (or $80,000 with the standard 50+ catch-up, and $83,250 for ages 60–63). But you need considerably more income to reach that ceiling with a SEP IRA alone.
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Employee deferral | Not allowed | Up to $24,500 ($32,500 age 50+; $35,750 age 60–63) |
| Employer contribution | ~20–25% of compensation | ~20–25% of compensation |
| 2026 combined max | $72,000 | $72,000 (+catch-up) |
| Roth option | No | Yes, if plan allows |
| Loan option | No | Yes, up to $50,000 |
| Catch-up contributions | Not allowed | Allowed |
Where the SEP IRA Wins
The Solo 401(k) isn't strictly better in every situation. The SEP IRA has two real advantages:
Simplicity. A SEP IRA is a single account with essentially no ongoing paperwork. There's no annual filing requirement, no plan document to maintain, and most brokerages let you open one online in minutes.
Deadline flexibility. A SEP IRA can be opened and funded as late as your tax-filing deadline, including extensions — October 15 of the following year for most sole proprietors. A Solo 401(k), by contrast, must be legally established (the paperwork signed and the plan adopted) by December 31 of the tax year you're contributing for, even though the actual cash doesn't have to move until your filing deadline. If you're filing your return late and just realized you want to shelter more income, and it's already January, a SEP IRA may be your only option for the prior year.
Where the Solo 401(k) Wins
For most self-employed people under six figures in net income, the Solo 401(k)'s employee-deferral bucket alone justifies the extra setup. On top of that:
- Roth contributions. Many Solo 401(k) providers let you designate all or part of your employee deferral as Roth — you pay tax now, and both contributions and growth come out tax-free in retirement. SEP IRAs offer no Roth option (though SECURE 2.0 opened the door to Roth employer contributions in solo 401(k)s at some providers, still an evolving feature).
- Participant loans. You can typically borrow up to $50,000 or 50% of your vested balance, whichever is less — useful if you need short-term liquidity without a taxable withdrawal. SEP IRAs don't allow loans.
- Catch-up contributions. If you're 50+, the Solo 401(k)'s deferral catch-up ($8,000 standard, $11,250 for ages 60–63) is on top of the regular limits. SEP IRAs have no catch-up provision at all.
The tradeoff: a Solo 401(k) requires a formal plan document, and once account assets cross $250,000 you're required to file an annual Form 5500-EZ with the IRS (a short form, but a form nonetheless). Most solo practitioners find this a small price for the extra contribution room.
Which One Should You Actually Pick?
A rough decision framework:
- Net self-employment income under ~$150,000, and you want to maximize contributions relative to income → Solo 401(k). The employee deferral bucket does the heavy lifting.
- You want the simplest possible setup and don't mind a lower ceiling → SEP IRA.
- You're already late in the year (past December 31) and need to open something for the prior tax year → SEP IRA is your only option; a Solo 401(k) can't be backdated.
- You want Roth contributions or the ability to borrow against your balance → Solo 401(k).
- You have a side business alongside a W-2 job with its own 401(k) → Run the numbers carefully; your employee-deferral limit is shared across all 401(k) plans, but the employer-contribution side of a Solo 401(k) is independent, so it can still be worth opening.
Neither plan requires you to contribute the maximum every year — both are flexible year to year, which matters when self-employment income swings.
Keep the Records That Make This Decision Easy
Whichever plan you choose, the contribution math depends entirely on knowing your actual net self-employment income — not a rough guess in December. That means clean, current books: separated business and personal transactions, accurate expense categorization, and a real-time view of year-to-date profit so you (or your accountant) can calculate the employer contribution correctly before a deadline sneaks up on you.
Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in, and a ledger that makes pulling your net self-employment income for a SEP IRA or Solo 401(k) calculation a matter of running a query, not digging through a shoebox of receipts. Get started for free and see why developers and finance professionals are switching to plain-text accounting.