The three retirement plans built for self-employed owners — SEP-IRA, SIMPLE IRA, and Solo 401(k) — each carry different contribution ceilings, setup rules, and employee coverage requirements. 2026 limits and which one fits your situation.
Self-employed owners choose from three IRS-designed retirement plans: the SEP-IRA (up to $72,000 in 2026, employer-only contributions, maximum simplicity), the SIMPLE IRA (up to $17,000 in employee deferrals, mandatory employer match, best if you have W-2 employees), and the Solo 401(k) (up to $72,000 combined, higher limits at lower income levels, no full-time employees allowed). All three reduce current taxable income. The right pick depends on whether you have employees and how much you earn.
W-2 employees rely on their employer's 401(k) match. Self-employed owners have no employer forcing retirement savings — which also means no restrictions on how much they can design a plan optimized for their situation. The three plans built specifically for this are the SEP-IRA, the SIMPLE IRA, and the Solo 401(k). Each carries different contribution ceilings, employee-coverage requirements, and administrative overhead.
When you work for yourself — as a sole proprietor, single-member LLC, S-Corp owner, or partner — there's no auto-enrollment, no employer match, and no built-in mechanism keeping contributions on track. The IRS designed three vehicles specifically for this situation, all documented in IRS Publication 560:
1. SEP-IRA (Simplified Employee Pension): Employer-only contributions funded by the business. No salary deferral. Maximum simplicity. 2. SIMPLE IRA (Savings Incentive Match Plan for Employees): Salary deferrals plus a required employer match. Designed for small teams with W-2 employees. 3. Solo 401(k) (One-Participant 401(k)): Both employer and employee contributions. Works only if you have no full-time employees other than a spouse.
All three reduce your current taxable income. The right choice depends primarily on whether you have employees and at what income level you're operating.
The SEP-IRA requires the least ongoing administration of the three plans. There's no annual IRS filing requirement as long as plan assets stay below $250,000, no plan document to maintain, and you can open one at any major financial institution (Fidelity, Vanguard, Schwab) with a straightforward account application.
2026 contribution limit: Up to 25% of compensation, with a maximum of $72,000 for 2026. The IRS announced this limit via its 2026 COLA announcement. The compensation cap used in the calculation is $360,000.
The self-employed calculation: For a sole proprietor or single-member LLC owner, the effective rate is approximately 20% of net Schedule C income (not 25%), because you first subtract the deductible half of self-employment tax before calculating. A business with $100,000 in net profit supports a SEP-IRA contribution of roughly $18,587 — not $25,000. IRS Publication 560 provides the exact worksheet and the self-employed compensation formula.
If you have employees: You must contribute the same percentage for all eligible employees as you contribute for yourself. If you put in 20% for yourself, you put in 20% for every employee who has worked for you in at least 3 of the past 5 years and earned at least $750. For a solo business, this is irrelevant. For a business with even a few staff members, SEP contributions for employees become a meaningful cost.
Deadline: The plan can be established and funded as late as your tax filing deadline, including extensions (October 15 for individual filers). This makes it the most flexible plan for owners who decide late in the tax year to make a retirement contribution.
Best for: Solo operators and S-Corp owners who want the maximum contribution with minimal ongoing compliance — and who want to retain flexibility on whether and how much to contribute from year to year.
The SIMPLE IRA is structured differently. It requires employee salary deferrals and a mandatory employer match. It was designed for businesses with up to 100 employees who want to offer a workplace retirement benefit without the complexity and cost of a full 401(k).
2026 contribution limit: Employees can defer up to $17,000 from their salary. The catch-up limit is $4,000 for employees age 50 and over; under the SECURE 2.0 Act, employees age 60–63 can defer an additional $5,250 above the base limit in 2026, per IRS SIMPLE IRA contribution rules.
Employer contribution: Required — no opt-out. You must either (a) match employee deferrals dollar-for-dollar up to 3% of compensation, or (b) make a 2% non-elective contribution for all eligible employees regardless of whether they defer. The 2% non-elective option applies to all eligible employees including those who don't participate — it can be more expensive than it looks.
Employee eligibility: The plan must generally cover all employees who earned at least $5,000 in any two prior years and expect to earn $5,000 in the current year. Thresholds can be lowered but not raised.
Deadline: New SIMPLE IRAs must be established by October 1 of the year they take effect.
Best for: Self-employed owners with 5–30 W-2 employees who want to give their team a retirement benefit. Not efficient for a true solo operator — the Solo 401(k) produces better results at lower overhead.
The Solo 401(k) — called the One-Participant 401(k) by the IRS (irs.gov/retirement-plans/one-participant-401k-plans) — is structured like a full corporate 401(k), except it's available only to self-employed owners with no full-time employees other than a spouse. You wear two hats: employee (salary deferral) and employer (profit-sharing contribution).
2026 contribution limits: - Employee deferral: up to $24,500 (same as a regular 401(k) plan), per the IRS 2026 limits announcement - Catch-up (age 50+): additional $8,000, for a total employee deferral of $32,500 - Enhanced catch-up (age 60–63, SECURE 2.0): additional $11,250, for a total deferral of $35,750 - Employer profit-sharing: up to 25% of W-2 compensation (for S-Corp owners) or approximately 20% of net self-employment income (for sole proprietors) - Combined annual total: $72,000 — the same ceiling as the SEP-IRA, but reached by a different path
Why the Solo 401(k) wins at moderate income: At lower income levels, the employee deferral component makes a significant difference. A sole proprietor earning $60,000 in net income can defer $24,500 via salary deferral plus contribute roughly $10,000 in employer profit-sharing — totaling approximately $34,500. The SEP-IRA on the same $60,000 is limited to roughly $11,000. The two plans converge near the $72,000 ceiling only at high income levels.
Roth option: Most custodians (Fidelity, Schwab, TD Ameritrade) offer a Roth Solo 401(k) variant. Contributions go in after-tax; qualified withdrawals are tax-free. Under IRS Roth designated account rules, in-plan Roth conversions are also permitted for Solo 401(k) plans that include the Roth feature. For owners in lower tax brackets now who expect higher rates in retirement, the Roth option can make sense.
Annual filing: Once Solo 401(k) plan assets exceed $250,000, you must file Form 5500-EZ with the IRS annually. Below that threshold, no annual filing. Most self-employed owners in accumulation years fall below this threshold for the first several years.
Deadline: The plan document must be signed by December 31 of the contribution year — unlike the SEP-IRA, you can't open it retroactively in April. Contributions can follow through the tax filing deadline including extensions. Begin the setup process in October or November if you're considering one.
Choose a Solo 401(k) if you're a true solo operator with no full-time employees other than a spouse, your income is below the level where the SEP-IRA and Solo 401(k) converge (~$200,000+ net self-employment income), and you want to maximize contributions now. The employee deferral component produces meaningfully higher contribution limits at moderate income.
Choose a SEP-IRA if you have or expect to hire eligible employees, you want the flexibility to contribute varying amounts from year to year (or skip entirely in a bad year), you're an S-Corp owner who prefers to fund retirement at tax time, or you simply want the lowest-overhead option. The IRS SEP plan resource page documents the contribution worksheet, employee coverage rules, and the full deadline calendar.
Choose a SIMPLE IRA if you have W-2 employees and want to give them a retirement benefit as part of their compensation package. It's less efficient than the other two for a solo operator but the right tool for a team.
For help with the contribution worksheets — especially the self-employed compensation calculation for SEP-IRAs or the combined-contribution math for Solo 401(k) — see IRS Publication 560 and work with a CPA who understands your entity structure. The interaction between W-2 salary, distributions, and retirement contributions is particularly important for S-Corp owners. For context on how the S-Corp reasonable compensation requirement affects your total tax picture, see S-Corp Payroll: The Reasonable Compensation Rule Explained. For the full self-employment tax picture that feeds into the SEP-IRA contribution calculation, see Sole Proprietorship Taxes Explained.
This content is for educational purposes only and does not constitute tax or investment advice. Consult a qualified CPA or financial advisor before making retirement plan elections.
Both allow contributions up to $72,000 in 2026. The key differences: the Solo 401(k) allows employee salary deferrals (up to $24,500), which produce larger deductions at lower income levels. The SEP-IRA is employer-only (no salary deferral), making its effective limit roughly 20% of net self-employment income — meaningfully lower at moderate income. At high incomes (above ~$200,000 net self-employment income), both plans converge near the same ceiling. The SEP-IRA is simpler to administer and can be established up to your tax filing deadline; the Solo 401(k) must be established by December 31 of the contribution year.
Generally no — you cannot maintain both a SEP-IRA and a Solo 401(k) for the same self-employment business in the same year. The IRS limits the combined annual additions to all plans maintained by a single employer. You can choose one or the other. Exception: if you have a W-2 job with a different employer's 401(k), you can still have a SEP-IRA or Solo 401(k) for your self-employment income, but the combined contribution limits still apply. Consult a CPA before maintaining multiple plans.
Yes — S-Corp owner-employees are among the most common Solo 401(k) users. Because you receive W-2 wages from the S-Corp, you can defer up to $24,500 of your W-2 salary into the plan in 2026, plus the S-Corp can make an employer profit-sharing contribution of up to 25% of your W-2 compensation. The combined employee + employer total cannot exceed $72,000 (or $80,000 with 50+ catch-up). The plan must be established before December 31 of the contribution year, and it must cover only you (and a spouse if they also work in the business). If the S-Corp has other full-time employees, a Solo 401(k) is not available.
Hiring employees changes your options significantly. A Solo 401(k) becomes unavailable once you have full-time employees (other than a spouse). A SEP-IRA requires you to make the same percentage contribution for all eligible employees as you make for yourself — if you put in 20% for yourself, you must put in 20% for every eligible employee. A SIMPLE IRA was designed for teams and handles employee participation more cleanly with a mandatory match structure. The transition from a solo plan to one that covers employees is a real cost event; factor it into your hiring economics and consult a plan administrator before adding staff.
SEP-IRA: can be established and funded as late as your tax filing deadline including extensions (October 15 for sole proprietors who file an extension). SIMPLE IRA: must be established by October 1 of the year it takes effect for new plans; existing plans continue annually. Solo 401(k): the plan document must be signed by December 31 of the contribution year, but you can make your contributions through the tax filing deadline (including extensions). The December 31 plan-establishment deadline for the Solo 401(k) is the most common deadline missed — start the process in October or November to allow time for paperwork.