SEP IRA vs Solo 401(k) for Side Income, the 2026 Contribution Math

On $45,000 of side profit, a SEP IRA allows about $8,364 for 2026 and a solo 401(k) up to about $32,864, if you have no day-job 401(k) deferrals. The amount depends on your profit, a special self-employed calculation, and any 401(k) you already contribute to elsewhere. Limits below are the IRS figures for 2026, as of October 2026.

1. The two plans in brief

1.1. SEP IRA

According to the IRS, employer contributions to a SEP-IRA cannot exceed the lesser of 25% of compensation or $72,000 for 2026. SEPs do not allow elective salary deferrals or catch-up contributions. In other words, every SEP dollar is an "employer" contribution, even when the employer is you.

1.2. Solo 401(k)

The IRS describes a one-participant 401(k) as a traditional 401(k) covering a business owner with no employees, or that person and a spouse. It has the same rules as any other 401(k). The owner contributes in two roles:

• As the employee: elective deferrals up to 100% of earned income, up to the annual deferral limit. For 2026, the IRS set that limit at $24,500.
• As the employer: nonelective contributions, figured with the self-employed calculation below.

Total contributions, not counting catch-up contributions, cannot exceed the overall annual limit: the lesser of 100% of compensation or $72,000 for 2026.

2. The self-employed calculation

You cannot simply take 25% of your Schedule C profit. The IRS explains that for a self-employed person, plan compensation is net earnings from self-employment reduced by both the deductible half of your self-employment tax and your own plan contribution. Because the contribution and the compensation depend on each other, the IRS suggests using a reduced contribution rate: divide the plan rate by 100% plus the plan rate.

For the maximum 25% rate, that is 25% / 125% = 20% of net profit after subtracting half of your self-employment tax. Publication 560 includes a rate table and worksheets for this.

3. A worked example: $45,000 of side profit

Assume a sole proprietor with $45,000 of Schedule C net profit in 2026, under age 50, using the standard self-employment tax method.

SEP IRA maximum: about $8,364.

Solo 401(k) maximum, if you have no other 401(k) deferrals this year: the same $8,364 employer contribution, plus up to $24,500 in elective deferrals. Your deferral cannot exceed what is left of your earned income after the employer contribution, which here is about $33,457, so the full $24,500 fits. Total: about $32,864.

The difference is the deferral. At this profit level, a solo 401(k) can shelter roughly four times as much as a SEP.

4. The day-job catch

Many side earners also have a W-2 job with a 401(k). The IRS warns that the elective deferral limit applies per person, not per plan. A business owner who also participates in another company's 401(k) must count all deferrals made during the year.

Using the same $45,000 example:

If you already max out deferrals at work, a solo 401(k) adds nothing over a SEP on the employee side. The employer contribution is still available in either plan.

5. Other differences worth knowing

• Paperwork: the IRS says a one-participant 401(k) generally must file Form 5500-EZ once plan assets reach $250,000 or more at year end. Smaller plans may be exempt.
• Hiring changes things: the solo 401(k) avoids nondiscrimination testing only while there are no common-law employees. If you hire employees who meet the eligibility rules, they must be included.
• Where the deduction goes: the IRS says contributions for yourself are deducted on Schedule 1 of Form 1040, not on Schedule C.
• Catch-up contributions: a 401(k) can allow catch-up deferrals for people 50 and older; SEPs do not allow catch-ups.

6. How to choose

1. Estimate your net profit for the year and subtract half of your self-employment tax.
2. Multiply by 20% to find the employer contribution that either plan allows.
3. Check how much you have already deferred into any day-job 401(k) this year.
4. If you have deferral room left and want to save more than the 20% figure, compare solo 401(k) providers.
5. If simplicity matters more, or your day-job deferrals are already maxed, a SEP may be enough.
6. Use the worksheets in IRS Publication 560 to confirm the final numbers.

7. Key takeaways

• A SEP IRA allows employer contributions up to the lesser of 25% of compensation or $72,000 for 2026, with no deferrals or catch-ups.
• A solo 401(k) adds elective deferrals of up to $24,500 for 2026 on top of the employer contribution.
• For the self-employed, the 25% rate becomes 20% of net profit after subtracting half of self-employment tax.
• On $45,000 of profit, the SEP maximum is about $8,364, and the solo 401(k) maximum is about $32,864 with no other deferrals.
• Deferral limits are per person, so day-job 401(k) contributions reduce what you can defer in a solo 401(k).