SEP-IRA vs Solo 401(k) for Contractors: Which One Shelters More in 2026?

Short answer: For 2026 both plans top out at $72,000, but they get there differently. A SEP-IRA can only reach that ceiling through the employer piece — up to 25% of your compensation. A Solo 401(k) stacks a $24,500 employee deferral on top of that same 25% employer piece, so at moderate profit it shelters dramatically more. Below roughly $290,000 of net self-employment income, the Solo 401(k) wins. Near the top they converge at $72,000 and the SEP's simplicity can win on convenience.

Part of our contractor tax planning hub. If you want the fastest way to cut a large tax bill and keep the money, a retirement plan is usually it.

Which one lets me save more?

For most trade contractors, the Solo 401(k). It is not close, and here is why. A SEP-IRA — a Simplified Employee Pension, a retirement account your business funds on your behalf — has exactly one lever: an employer contribution of up to 25% of your compensation. That is the whole plan. There is no second slot.

A Solo 401(k) — a one-participant 401(k) for a business with no employees other than the owner and spouse — has two levers. First, an employee deferral, which is the money you elect to put in out of your own earnings: $24,500 for 2026. Second, that same 25% employer contribution on top. The two stack until you hit the $72,000 combined ceiling.

That stack is the entire advantage. The Solo 401(k) fills a big piece of the ceiling with the $24,500 deferral before the employer 25% even starts. The SEP has to reach the same $72,000 on the employer piece alone, which takes a lot more profit. So at the same income, the Solo 401(k) almost always shelters more.

How much can a contractor netting ~$100K actually put away?

Let me walk the numbers for a self-employed roofer who nets $100,000, because this is where the gap gets real.

The SEP side. The SEP allows the employer contribution only: up to 25% of compensation. For a self-employed person, "compensation" is your net earnings after backing out part of your self-employment tax — the 15.3% Social Security and Medicare tax you owe on business profit as both the employer and the employee — and the effective rate against Schedule C profit works out to roughly 20% rather than a flat 25%. On $100,000 of net income, that produces something in the neighborhood of $18,000 to $20,000. Call it about $18,600. That is the entire SEP contribution. There is no other lever to pull.

The Solo 401(k) side. The Solo 401(k) allows that same employer piece — roughly $18,600 on the same profit. Then it adds the $24,500 employee deferral on top. Add those together and you are at about $43,100. On the exact same $100,000 of net income, the Solo 401(k) shelters more than double what the SEP does. The deferral is money the SEP simply cannot access.

That $24,500 is the difference. It is not a rate difference or a fine-print quirk. It is a whole second contribution the SEP structurally does not have. For a contractor netting $100K, choosing the SEP over the Solo 401(k) leaves roughly $24,500 of shelter on the table every year.

How much tax does that actually save me?

These contributions reduce your income tax. The employee deferral and the employer piece both come off your taxable income, and the employer contribution is a deductible business expense. On the roofer's numbers, sheltering about $43,100 in a Solo 401(k) versus about $18,600 in a SEP means roughly $24,500 more comes off taxable income — which, depending on your bracket, is often several thousand dollars of income tax that stays in your pocket this year.

One thing I want to be blunt about, because it is a common misread: retirement contributions do not reduce your self-employment tax. The 15.3% SE tax is calculated on your net Schedule C profit before any retirement contribution. Putting money in a SEP or Solo 401(k) lowers income tax, not SE tax. If you want to cut SE tax, that is a different conversation — usually about entity structure and reasonable compensation, which we cover in our guide to self-employment tax for contractors. Keep the two levers separate in your head.

At what income does the SEP catch up?

They converge at the top. Both plans cap at $72,000 for 2026, so once your profit is high enough that the 25% employer piece alone hits $72,000, the extra deferral slot in the Solo 401(k) has nowhere left to go. That happens near roughly $290,000 of net self-employment income. Above that neighborhood, both plans land at the same $72,000 ceiling and the SEP delivers it with less paperwork.

So the rule of thumb is clean: below roughly $290,000 of net self-employment income, the Solo 401(k)'s deferral stack wins — and the lower your profit, the bigger the gap. Near and above that level, they converge at $72,000, and the SEP's simplicity can be worth the small convenience it buys. For the typical trade contractor netting well under $290K, that means the Solo 401(k) is the plan that shelters more.

What if I'm 50 or older?

The Solo 401(k) advantage gets bigger, not smaller. If you are 50 or older, you can add a catch-up contribution — the extra amount the IRS lets older savers put in — of $8,000 for 2026 on top of the $24,500 deferral. That brings your employee piece alone to $32,500 before the employer 25% is even counted. If you are in the 60-to-63 age band, the super catch-up is larger still at $11,250, pushing your deferral to $35,750.

The SEP has no catch-up at all. It is employer contributions only, at any age. So the older you are, the more the Solo 401(k)'s deferral-plus-catch-up stack pulls ahead of a SEP on the same income — right up until you hit the shared $72,000 ceiling.

SEP-IRA vs Solo 401(k) at a glance

You can confirm the underlying 2026 figures in the IRS announcement, 401(k) limit increases to $24,500 for 2026. Every number in this post is a 2026 figure from IRS Notice 2025-67.

Where does the money to fund this come from?

This is the part contractors trip on. The deferral is only useful if the cash is actually there when you file. If you spend every dollar of profit as it lands, there is nothing left in December to fund $43,100. So the funding plan and the tax plan have to move together.

The habit I push is simple: set aside 25 to 30% of every net dollar for taxes — 30% here in California — the moment it comes in, in a separate account you do not touch. That reserve is what covers your tax bill, and the profit left over is what funds the retirement contribution. If you have never built that muscle, start with our pieces on how much to set aside for taxes and how to pay yourself as a contractor. Fund the reserve first, then fund the plan.

One timing note that works in your favor: a SEP can be opened and funded up to your filing deadline, including extensions, which gives you room to make the call after you know your profit. A Solo 401(k) generally needs to be established by year-end to take a deferral for that year, even though the dollars can go in later. If the calendar is tight in your first year, that difference sometimes decides which plan you use for the current year — then you can switch strategies going forward.

So which should I actually pick?

If you are a self-employed contractor netting under about $290,000, open a Solo 401(k). The $24,500 deferral — more if you are 50-plus — lets you shelter far more of your profit than a SEP ever could at that income, and that shelter is real income-tax savings this year. The only reasons to lean SEP are if your net income is near or above the level where the employer 25% alone already fills the $72,000 ceiling, or if you value the SEP's slightly simpler setup and later funding deadline enough to give up the deferral. For most trade contractors, neither of those applies, and the Solo 401(k) is the plan that keeps more money.

Not sure whether your profit level makes the SEP or the Solo 401(k) the right call for 2026? We run the numbers on your actual net income, pick the plan that shelters the most, and line up the funding so the cash is there when you file. Book a meeting with our team here.