Solo 401(k) or SEP-IRA, which should I open?

Below ~$115k profit the solo 401(k) shelters dramatically more, because the $23,500 employee deferral exists on top of the 20%. SEP wins only on setup laziness, and modern brokers have made solo 401(k)s nearly as easy.

Do contributions reduce my self-employment tax?

No, they reduce income tax only. SE tax is computed on profit before retirement contributions. This surprises almost everyone the first year.

Can I contribute for last year?

Employer-side contributions: yes, until your filing deadline including extensions, for both plans. The solo 401(k) employee deferral needs the plan established by December 31 of the tax year, the classic December panic.

Calculators

Solo 401(k) / SEP-IRA calculator

Self-employment's consolation prize: contribution limits employees can only dream of. Same profit, two plans, different ceilings, the solo 401(k) usually wins because you contribute as employee AND employer.

Your numbers

Annual net profit

Schedule C bottom line, before any retirement contributions.

Your age at year end

years

Decides the catch-up tier: 50+ adds $7,500; 60–63 adds $11,250 (SECURE 2.0).

What the ledger says

Solo 401(k) ceiling$42,087per year

SEP-IRA ceiling: $18,587
Your employee deferral: $23,500
Your employer profit-share (20%): $18,587
Catch-up allowance: $0
Contribution base (profit − ½ SE tax): $92,935

Estimate, not advice

The formula

Base = profit − half your SE tax. Solo 401(k) = employee deferral (up to $23,500 + catch-up) + 20% of base as employer, capped at $70,000 (+ catch-up). SEP-IRA = 20% of base only, same $70,000 cap. 2025 limits.

What this ignores

Roth vs traditional choice, spouse-on-payroll strategies, defined-benefit plans for very high earners, and employees (if you have any, SEP rules change sharply). Deadlines differ too: solo 401(k) must exist by December 31.

Field notes

Solo 401(k) or SEP-IRA, which should I open?: Below ~$115k profit the solo 401(k) shelters dramatically more, because the $23,500 employee deferral exists on top of the 20%. SEP wins only on setup laziness, and modern brokers have made solo 401(k)s nearly as easy.
Do contributions reduce my self-employment tax?: No, they reduce income tax only. SE tax is computed on profit before retirement contributions. This surprises almost everyone the first year.
Can I contribute for last year?: Employer-side contributions: yes, until your filing deadline including extensions, for both plans. The solo 401(k) employee deferral needs the plan established by December 31 of the tax year, the classic December panic.