Prompt CPAIt's September. If you're self-employed and you've been meaning to "get a retirement plan set up," this is the month that decision stops being theoretical — because for one of the two plans most solo business owners consider, the practical deadline is December 31, and for the other it's the day you file your return next year. That difference isn't a footnote. It's often what actually decides which plan you end up with.
The two plans are the solo 401(k) — the IRS calls it a one-participant 401(k) — and the SEP-IRA. The solo 401(k) is built specifically for a business with no employees other than the owner and the owner's spouse; a SEP is available to an employer of any size, but for a one-person business it works much the same way. Both let you put away far more than an IRA. But at the same income they generally don't let you put away the same amount, and they don't ask you to decide at the same time.
The short version of how each one works
A SEP-IRA is employer-funded. Only the employer contributes — there's generally no employee salary deferral — and the contribution is capped at 25% of compensation. Setup is genuinely simple: for many owners it's a one-page IRS model form (Form 5305-SEP) or a provider's equivalent, with no annual government filing, and you can open and fund it as late as the due date of your business return, including extensions.
A solo 401(k) has two parts. You contribute as the employee (an elective deferral), and your business contributes as the employer (a profit-sharing contribution). Stacking the two is why the same income supports a much larger total. The tradeoff is a real plan document, an annual filing once the plan gets large enough, and — critically — a setup timeline that in most cases runs out at the end of the calendar year.
The 2026 numbers
The IRS released the 2026 retirement plan limits in Notice 2025-67. The ones that matter here:
- Employee elective deferral (401(k)): $24,500.
- Age 50+ catch-up: an additional $8,000, for a deferral of up to $32,500.
- Ages 60–63 "super" catch-up: $11,250 instead of the $8,000, for a deferral of up to $35,750 — available if you turn 60, 61, 62, or 63 during 2026.
- Total annual additions (employee plus employer): $72,000. Catch-up contributions sit on top of this limit rather than inside it.
- Compensation that can be counted: $360,000.
- Social Security wage base: $184,500, which drives the self-employment tax math below.
A SEP generally has no employee deferral and no catch-up, so a SEP contribution is generally capped at the lesser of 25% of compensation or that same $72,000.
What that looks like on a real number
Take a freelancer — consultant, contractor, designer, independent engineer — filing a Schedule C with $150,000 of net profit in 2026, under age 50, no employees.
Self-employed people don't get to use net profit directly. You first compute net earnings from self-employment (92.35% of net profit), calculate self-employment tax on that, and then reduce net profit by the deductible half. Here that's $138,525 of net earnings, roughly $21,194 of SE tax (all of it below the $184,500 Social Security wage base), and about $10,597 as the deductible half — leaving roughly $139,403 as the base for the employer contribution.
There's one more wrinkle: because your own contribution reduces the earned income that same contribution is measured against, a 25% plan rate works out to an effective 20% for the owner. The IRS publishes this reduced rate in its Publication 560 rate table so you don't have to solve the circular math yourself.
| 2026 — $150,000 Schedule C net profit | SEP-IRA | Solo 401(k) |
|---|---|---|
| Employee deferral | — | $24,500 |
| Employer contribution (20% of $139,403) | $27,880 | $27,880 |
| Total | $27,880 | $52,380 |
| If age 50–59, adding the $8,000 catch-up | $27,880 | $60,380 |
Figures are rounded and illustrative; your own numbers depend on your actual profit, any other wages, and your plan's terms.
At higher incomes the two converge, because both eventually run into the $72,000 ceiling. A solo 401(k) generally reaches $72,000 once the employer base above is around $237,500; a SEP generally doesn't get there until that base is around $360,000. (That second figure is a coincidence of the arithmetic, not the $360,000 compensation cap above doing the work.) Below those points the deferral is doing the heavy lifting — and if your self-employment income is modest, the deferral can be nearly the whole contribution, since it can generally be up to 100% of your compensation from the business, subject to the annual cap.
The deadlines — where most of the real decision lives
This is the part that tends to surprise people, usually in April.
A SEP is the plan you can still open next year. You can set up and fund a SEP for 2026 as late as the due date of your return for 2026, including extensions. If you extend, that can run into October 2027. Nothing has to happen in 2026 at all.
A solo 401(k) generally isn't. Because the employee piece is a deferral of compensation, a self-employed person's deferral election generally has to be made no later than the last day of the tax year — that compensation is treated as available on the last day of the year, and you can't elect to defer money that's already been made available to you. For a 2026 deferral, that's generally December 31, 2026.
There is one meaningful exception, added by SECURE 2.0, and it's narrow:
- Sole proprietors and single-member LLCs adopting their first 401(k) plan can generally establish the plan and make first-year elective deferrals as late as the due date of the owner's individual return, determined without regard to extensions — April 15, 2027 for a 2026 plan year.
- S corporations and partnerships don't get this relief. If your business is an S-corp, the plan generally needs to exist and the deferral needs to run through payroll before year-end.
- It applies to the first plan year only. In later years the December 31 election deadline is back.
The employer profit-sharing side is more forgiving in both plans: employer contributions can generally be made up to the due date of the return, including extensions. It's the deferral — the part that makes the solo 401(k) worth having — that's time-sensitive.
If you're an S corporation, the math changes
An S-corp owner-employee isn't computing earned income off a Schedule C. Both contribution pieces are measured against your W-2 wages, not the company's total profit:
- The deferral comes out of your wages and generally has to be elected before those wages are paid — so it has to be set up in payroll, not decided at tax time.
- The employer contribution is generally up to 25% of your W-2 compensation as the plan defines it. The 20% adjustment above doesn't apply here, because there's no circular earned-income calculation to solve.
The consequence catches people off guard: distributions don't count. An owner paying an $80,000 salary and taking the rest as distributions is generally looking at an employer contribution of up to about $20,000, plus the $24,500 deferral — regardless of how profitable the company was that year. Your reasonable compensation figure is therefore also a retirement-plan input, which is one more reason to model it rather than pick a round number.
Three things that decide it beyond the contribution limits
Backdoor Roth contributions
If you're a high earner who uses a backdoor Roth — contribute to a traditional IRA, then convert — a balance sitting in a SEP-IRA is a problem. Traditional, SEP, and SIMPLE IRA balances are aggregated when figuring the taxable portion of a conversion, so pre-tax SEP money generally makes every conversion partly taxable. Solo 401(k) balances aren't part of that calculation. For someone running the backdoor Roth each year this alone often settles the question, and it's also why owners with an existing SEP balance sometimes roll it into a solo 401(k) before year-end to clear the base.
What happens when you hire someone
A SEP requires the same contribution percentage for every eligible employee — generally anyone 21 or older who has worked for you in 3 of the last 5 years and received at least $800 of compensation in 2026. The rate that has to match is the plan's rate, not the owner's reduced one: set the plan at 25% and every eligible employee generally gets 25% of their pay, because the 20% figure above is only how that same 25% plan rate is computed on self-employment earnings. A solo 401(k), meanwhile, stops being a one-participant plan once a non-spouse employee becomes eligible, which brings testing and a full Form 5500 with it. Neither is a reason to avoid a plan; both are reasons to think about it before you hire rather than after.
Paperwork and loans
A SEP has essentially no ongoing administration. A solo 401(k) has a plan document, and once the combined assets of your one-participant plans exceed $250,000 at year-end an annual Form 5500-EZ is generally required (and a final-year return is required regardless of size). In exchange, a solo 401(k) can permit participant loans and designated Roth contributions where the plan provides for them. The law has also allowed Roth SEP contributions since 2023 where the arrangement provides for them, though provider support has been uneven — worth confirming with yours rather than assuming.
One 2026 change worth knowing: the Roth catch-up rule
Beginning with 2026 catch-up contributions, a participant whose prior-year FICA wages from the employer sponsoring the plan exceeded the threshold generally must make catch-up contributions as Roth rather than pre-tax. For 2026 that test looks at 2025 FICA wages above $150,000. The IRS issued final regulations in 2025 that are generally applicable for tax years beginning after December 31, 2026, with a reasonable, good-faith standard in the meantime.
Two practical points for this audience. First, the test is built on FICA wages — so a sole proprietor or partner with self-employment income and no FICA wages from the plan sponsor is generally not subject to it. Second, if it does apply to you as an S-corp owner-employee, your plan has to offer a designated Roth option for you to make catch-up contributions at all. That's a plan-document question worth raising with your provider before year-end rather than in late December.
What a contribution does to your other numbers
A deductible retirement contribution doesn't sit in isolation. For a sole proprietor, the deduction for contributions to your own plan generally reduces qualified business income, which means it also shrinks the base for the 20% Section 199A deduction — so the net benefit of a dollar contributed is typically somewhat less than your marginal rate alone would suggest. It's still usually worth doing; it just isn't a straight multiplication.
It also moves your estimated tax picture, and September is when that matters, with the third-quarter federal installment due September 15. A contribution you actually make lowers taxable income; a contribution you're merely planning does not. And if you're relying on a prior-year safe harbor, the contribution may not change what you owe in installments at all — only what you owe at filing.
The bottom line
For most self-employed people with no employees, the solo 401(k) allows a larger contribution at the same income, keeps the backdoor Roth clean, and offers Roth and loan features a SEP generally can't. The SEP's advantages are simplicity and timing — no plan document, no annual return, and the ability to decide after the year is over.
Which is why the honest framing isn't "which plan is better." It's closer to: do you want the option that requires a decision this year, or the one that doesn't? If the answer is the solo 401(k), September is a reasonable time to start, because plan providers, payroll changes, and account paperwork all take longer than the deadline suggests. If you get to December with nothing set up, the SEP is still there — and for a first-time sole proprietor, so is a narrow second chance.
Frequently asked questions
I have a W-2 job with a 401(k) and freelance income on the side. Can I still open a solo 401(k)?
Generally yes, if the side business has no employees other than you and your spouse. But the $24,500 elective deferral limit applies to you as a person across all 401(k) and 403(b) plans combined — so if you're already maxing deferrals at your day job, you generally can't defer again in the solo plan. The employer profit-sharing contribution is a separate matter and is generally applied per employer, so it can often still be made — assuming the two businesses aren't related to each other for these purposes.
The mistake runs in the other direction too: deferring the full amount in both plans creates an excess deferral that has to be corrected, usually by an April 15 deadline.
I already funded a SEP for 2026. Can I still switch to a solo 401(k)?
You can generally open a solo 401(k), but the $72,000 total limit generally applies across both plans, and some SEP arrangements — the IRS model Form 5305-SEP in particular — can't be used while you maintain another qualified plan. Coordinating both for a single year is usually more trouble than it's worth.
Separately, if the backdoor Roth is the reason you're switching, moving the existing SEP balance into the solo 401(k) before December 31 is generally what clears the pro-rata calculation, because the aggregation test looks at year-end IRA balances. That's a sequencing question worth getting right before you convert.
What happens to my plan if I hire my first employee?
With a SEP, once an employee meets the eligibility conditions you generally have to contribute the same percentage of their compensation that you contribute for yourself. With a solo 401(k), the plan stops being a one-participant plan and becomes a regular 401(k), with nondiscrimination testing and a full Form 5500. Neither outcome is disastrous, but both change the cost of the plan meaningfully — so it's better to plan the hire and the plan together.
Should my solo 401(k) contribution be Roth or pre-tax?
There's no universal answer. It turns mostly on whether your rate today is higher or lower than you expect it to be when you take the money out, and self-employed income tends to be uneven — which is exactly the situation where the answer can differ year to year. A low-profit year is often a better Roth year than a peak one.
Two mechanical notes: the employee deferral can generally be designated Roth if the plan provides for it, while the employer profit-sharing contribution is more commonly pre-tax; and if the 2026 Roth catch-up rule applies to you, that portion isn't optional.
Does a retirement contribution I haven't made yet reduce my Q3 or Q4 estimated tax payment?
Only once you actually make it, and only if you're computing your installments off current-year income. A deductible contribution reduces taxable income and therefore the tax the current-year method is measured against. If you're instead relying on the prior-year safe harbor, your required installments are generally driven by last year's tax — so the contribution may reduce the balance due at filing without changing what you pay in September or January.
Either way, the deduction is generally only available if the contribution is made by the applicable deadline for the plan, which for the employee deferral in a solo 401(k) is usually the end of the year.
This article is general educational information, not individualized tax advice. Please consult a qualified tax professional about your own situation before making decisions.