Self-employed business owners and single-member LLC owners have access to two of the highest-contribution retirement plans available: the Solo 401(k) and the SEP-IRA. Both reduce taxable income dollar-for-dollar, but they calculate contributions differently, and at most income levels below $200,000, the Solo 401(k) lets you shelter significantly more.
How Each Plan Works
The SEP-IRA (Simplified Employee Pension) is funded entirely by employer contributions. You contribute as the employer, up to 25% of W-2 compensation for S-corp owners or 20% of net self-employment income for sole proprietors and single-member LLC owners (after the SE tax deduction). No employee contributions are allowed.
The Solo 401(k) (also called an Individual 401(k) or i401k) has two contribution buckets:
- Employee elective deferral: Up to $23,000 in 2024 ($30,500 if age 50+), regardless of income, as long as you have net self-employment income
- Employer profit-sharing: Up to 25% of W-2 compensation (S-corp) or 20% of net SE income (sole prop/LLC)
The combined total cannot exceed $69,000 in 2024 ($76,500 if age 50+).
2025 Contribution Limits
| Plan | Employee Contribution | Employer Contribution | Max Total (under 50) | Max Total (50+) |
|---|---|---|---|---|
| Solo 401(k) | $23,500 | Up to 25% of W-2 / 20% of net SE | $70,000 | $77,500 |
| SEP-IRA | None | Up to 25% of W-2 / 20% of net SE | $70,000 | $70,000 |
Side-by-Side Comparison
| Feature | Solo 401(k) | SEP-IRA |
|---|---|---|
| Roth option | Yes | No |
| Catch-up contributions (50+) | Yes (+$7,500) | No |
| Loan provision | Yes (up to 50% of balance, max $50,000) | No |
| Employees allowed | No (owner + spouse only) | Yes |
| Setup deadline | December 31 of tax year | Tax filing deadline (including extensions) |
| Administrative complexity | Moderate (Form 5500-EZ if assets exceed $250,000) | Simple |
| Best for | Most self-employed owners | Multiple-employee businesses; very high earners |
When Solo 401(k) Wins
The Solo 401(k)’s employee deferral component is the key advantage. At lower income levels, roughly under $200,000 in net SE income, the ability to contribute a flat $23,500 before the percentage-based employer contribution kicks in results in a much higher total contribution than a SEP-IRA allows.
Example: Net SE income of $80,000 (after SE tax deduction: ~$75,300)
- SEP-IRA max: ~$15,060 (20% of $75,300)
- Solo 401(k) max: $23,500 (employee) + ~$15,060 (employer) = $38,560
That additional $23,000 sheltered, at a 32% marginal rate, is roughly $7,400 in tax savings in a single year.
When SEP-IRA Wins
The SEP-IRA makes more sense when:
- You have employees: a Solo 401(k) is only available to businesses with no full-time employees other than the owner and spouse
- You missed the December 31 setup deadline for a Solo 401(k): a SEP-IRA can be opened and funded up to the tax filing deadline, including extensions (October 15)
- You want minimal administration: no plan documents, no Form 5500-EZ requirement, and no annual compliance work
- Your income is high enough that the employer contribution alone reaches the annual limit
The Roth Option
A Solo 401(k) can be designated as a Roth Solo 401(k), allowing you to make after-tax employee contributions that grow and distribute tax-free. Unlike a Roth IRA, there are no income limits on Roth Solo 401(k) contributions. High-income business owners who are phased out of Roth IRA eligibility can still make Roth contributions here.
The SEP-IRA has no Roth equivalent.
Deadlines
- Solo 401(k): The plan must be established by December 31 of the tax year, though contributions can be made up to the filing deadline. For new business owners, missing year-end is the most common reason they default to a SEP-IRA.
- SEP-IRA: Can be established and funded up to the tax filing deadline, including extensions, as late as October 15 for calendar-year filers.
When to Seek Help
Choosing between plans and sizing your annual contribution to maximize deductions without overfunding is part of year-round tax planning, not a decision to make at filing time. If you’re consistently profitable and not maximizing a retirement plan, you’re paying tax on money you could be compounding.
Last updated: 2026