Same law, different engines
Both accounts let a self-employed person play employer and employee at once — but only the solo 401(k) pays you for both roles. The SEP IRA takes a single employer contribution: 25% of W-2 wages, which for sole proprietors works out to ~20% of net self-employment earnings (profit minus half the SE tax) after the circular math. The solo 401(k) stacks two layers: an employee deferral — up to $23,500 in 2025, up to 100% of earnings — plus the same ~20% employer share, capped at $70,000 combined. At $50,000 of profit, that's roughly $9,200 (SEP) versus $32,700 (solo 401k) of deductible space. The deferral layer is the whole story at low and middle profits.
Where each one wins
- Side hustlers and profits under ~$100k: solo 401(k), decisively. The deferral shelters the first dollars at 100%, so a $20,000 side profit can stash ~$18,000+ — the SEP manages ~$3,700. One caveat for moonlighters: the deferral limit is shared across all your 401(k)s, so if a W-2 day job already eats the $23,500, your solo plan is left with just the employer share (still matching the SEP) — enter your W-2 deferrals above and the calculator handles it.
- Profits above ~$350k: a tie on dollars. Both hit the $70,000 cap; the solo 401(k) still adds the age-50+ catch-up ($7,500, or $11,250 at ages 60-63) that SEPs simply don't have.
- Simplicity and flexibility: SEP. Opens in minutes at any brokerage, no annual filing ever, and — uniquely — can be opened and funded after year-end, up to your tax-filing deadline including extensions. A one-time windfall year discovered at tax time is the SEP's home turf.
- Features: solo 401(k). Roth deferrals (build tax-free money in fat years — weigh with the Roth vs traditional calculator), participant loans up to $50,000, and a big backdoor-Roth advantage: SEP balances are pre-tax IRA money that poisons the pro-rata calculation, while solo 401(k) balances don't count against it. High earners planning backdoor Roths should avoid carrying SEP balances at all.
The fine print that catches people
- Deadlines differ by layer. The solo 401(k) plan should exist by December 31 for full flexibility (SECURE 2.0 allows late setup for the employer share, and sole proprietors get until the filing deadline for the prior year's first-year deferral). Deferral elections are best made in the calendar year; employer shares can wait until filing. The SEP forgives all procrastination.
- Form 5500-EZ at $250k. Once solo 401(k) assets pass $250,000, a short annual form is due — trivial, but the penalty for forgetting is vicious ($250/day). SEPs never file.
- Employees change everything. Hire anyone eligible and the SEP must contribute the same percentage for them as for you; the solo 401(k) stops being 'solo' entirely. Both remain workable with a spouse on payroll — a legitimate way to double the household's sheltered space.
- The employer share needs profit. Both employer contributions are capped by the ~20% math — at low profit, the SEP's entire value proposition shrinks while the solo 401(k)'s deferral keeps working.
Sequencing it with the rest of the plan
These accounts sit inside the bigger self-employment money loop: price your work so tax and retirement are funded (freelance rate calculator), skim for quarterly taxes as revenue arrives, then fill retirement space in rough order — HSA if eligible (the triple advantage), Roth IRA if under the income limits, then the solo 401(k)/SEP as profit allows. Every dollar contributed pre-tax also cuts this year's income tax at your marginal rate (check it against the brackets) — though not SE tax, which applies to profit before these deductions. Project what the sheltered money becomes with the retirement savings calculator.