Which lets me contribute more, a Solo 401(k) or a SEP IRA?

At almost any income below roughly $280,000 of compensation, the Solo 401(k) wins, often by a wide margin. It adds an employee salary deferral ($23,500 in 2025, $24,500 in 2026) on top of the same 25%-of-compensation employer contribution a SEP offers. Example: on an $80,000 S-Corp salary, a SEP maxes at $20,000 while a Solo 401(k) reaches $43,500. The two only converge at high income, where 25% of compensation already maxes the plan on its own.

I'm an S-Corp owner, what is my contribution based on?

Your W-2 wages, not your distributions. For both a SEP and a Solo 401(k), the employer contribution is 25% of your salary only, the distributions you take to save self-employment tax do not count toward retirement. That means the low salary you might choose to minimize payroll tax also caps your retirement contribution, so the two decisions have to be made together. The Solo 401(k) cushions a low salary better because its employee deferral is a flat dollar amount, not a percentage.

Can I have both a SEP IRA and a Solo 401(k)?

You can open both, but for the same business it rarely helps: the employer contributions across both plans share a single overall per-person limit ($70,000 in 2025, $72,000 in 2026, before catch-up), so a second plan does not double your room. For most owners it is cleaner to pick one. The exception worth a conversation is when you have genuinely separate, unrelated businesses, then the limits can apply per business.

What are the setup deadlines for each plan?

A SEP IRA can be set up and funded as late as your business return due date, including extensions, so you can open one after year-end and still claim it for the prior year. A Solo 401(k) can now also be established by the business return due date with extensions under the SECURE Act, a change from the old December 31 deadline. The Solo 401(k) does require a one-time plan document, and an annual Form 5500-EZ once plan assets reach $250,000.

Does a Solo 401(k) require an annual tax filing?

Only once the plan holds $250,000 or more in assets at year-end, at that point you file a Form 5500-EZ each year, a short information-only return. Below $250,000 there is no filing. A SEP IRA never requires a 5500 filing at all, which is its main advantage in simplicity. The 5500-EZ is straightforward, but the late-filing penalties are steep, so it is not something to skip once you cross the threshold.

Solo 401(k) vs SEP IRA: A Florida CPA's Guide

By Timothy LeGendre, CPA · Florida License #AC62625 · Published 2026-06-29 · Last reviewed 2026-07-16

A Florida CPA compares the Solo 401(k) and SEP IRA for self-employed and S-Corp owners, contribution limits, setup, and which one saves more tax.

The Short Answer

For most self-employed people and S-Corp owners, a Solo 401(k) lets you contribute more than a SEP IRA at the same income, often roughly double it at moderate earnings, because it has two contribution buckets where the SEP has one. A SEP's only lever is an employer contribution of up to 25% of your compensation. A Solo 401(k) adds an employee salary deferral on top of that same 25% employer piece, so you reach a high contribution at a much lower income. The SEP wins on exactly one thing: simplicity, no plan document, no annual filing, set it up in an afternoon. So the real decision is whether the extra paperwork of a Solo 401(k) is worth the bigger deduction. For most owners below roughly $280,000 of compensation, it is.

How each one actually works

Both plans let a self-employed person sock away pre-tax money that grows tax-deferred. The difference is in the plumbing.

A SEP IRA is the simple one. There's a single contribution, and it comes from the "employer" side of you, up to 25% of your compensation. For an S-Corp owner, that's 25% of your W-2 wages. For a sole proprietor, the math works out to about 20% of your net self-employment earnings (the percentage looks smaller because it's applied after backing out the self-employment-tax adjustment and the contribution itself). There's no employee deferral and no catch-up contribution. You can open one at almost any brokerage in minutes, and there's no annual government filing.

A Solo 401(k), also called an individual or one-participant 401(k), wears two hats. As the employee, you make a salary deferral. As the employer, you make a profit-sharing contribution of up to that same 25% of compensation. Both buckets are yours, because you're both people. Stack them and you reach a high total contribution at an income where a SEP would still be only partway there. That's the whole advantage, and it's why I steer most owners toward it.

Here's how the two stack up, feature for feature, before we get to the dollar figures:

Feature	Solo 401(k)	SEP IRA
Who contributes	You, as employee and employer	Employer side only
Employee salary deferral	Yes	No
Age 50+ catch-up	Yes	No
Employer profit-sharing	Up to 25% of compensation	Up to 25% of compensation
Maxes out at a lower income?	Yes	No
Roth option	Yes (if the plan allows)	Rare, newly permitted, not widely offered
Participant loans	Yes (if the plan allows)	No
Annual paperwork	Form 5500-EZ once assets reach $250k	None

The contribution limits, side by side

The IRS adjusts these numbers for inflation most years, so I keep them in one place rather than scattered through the article. The employee deferral and catch-up amounts apply to the Solo 401(k); the SEP has neither. Both plans share the same overall per-person ceiling. As of the 2025 and 2026 tax years:

Limit	2025	2026
Employee deferral (Solo 401(k) only)	$23,500	$24,500
Catch-up, ages 50+ (Solo 401(k) only)	$7,500	$8,000
Super catch-up, ages 60–63 (Solo 401(k) only)	$11,250	$11,250
Total per person (employee + employer)	$70,000	$72,000
Maximum compensation counted	$350,000	$360,000

A note on the catch-up rows: the standard age-50 catch-up is one number, but SECURE 2.0 created a higher "super catch-up" for the years you're ages 60 through 63. It holds at $11,250 for both 2025 and 2026. It did not rise with the regular catch-up, and it's not simply 150% of the new figure, so it's an easy one to overstate. The SEP, again, gets none of these, its only limit is the 25%-of-comp employer piece, capped at the same total ceiling.

Which one lets you put away more?

Take a real, common situation: an S-Corp owner who pays herself an $80,000 W-2 salary and wants to maximize her 2025 retirement contribution.

SEP IRA: 25% × $80,000 = $20,000. That's the whole story.

Solo 401(k): $23,500 employee deferral + (25% × $80,000) $20,000 employer = $43,500, more than double, on the exact same salary.

Same income, same business, same owner, and the Solo 401(k) shelters $23,500 more from tax. That gap is the employee deferral, which the SEP simply doesn't have. At a 22% or 24% federal bracket, contributing that extra $23,500 is several thousand dollars of federal tax saved this year, on top of decades of tax-deferred growth.

The two plans only converge at high income. Because the employer piece is capped at 25% of compensation, a SEP can eventually reach the same overall ceiling, but only once compensation is high enough (somewhere north of $280,000) that 25% of it already maxes the plan without needing the deferral. Below that, which is where almost every owner I work with sits, the Solo 401(k) wins, and the margin is widest at modest salaries. The lower your income, the more the employee deferral matters.

The S-Corp wrinkle most owners miss

Here's the part that trips up S-Corp owners, and it's the most important planning point in this whole article: your retirement contribution is based on your W-2 wages, not your distributions.

The reason people elect S-Corp status in the first place is to split their profit into a reasonable salary and tax-favored distributions, shrinking self-employment tax. But the employer retirement contribution, for both a SEP and a Solo 401(k), is calculated only on the salary. The distributions don't count. So the salary number you pick to minimize payroll tax is the same number that caps how much you can put into retirement. Those two goals pull in opposite directions.

Say that same owner had taken a $40,000 salary and $100,000 in distributions to keep self-employment tax low. Her SEP would be capped at 25% × $40,000 = $10,000, half of what her $80,000 salary allowed. Her Solo 401(k) would be $23,500 + $10,000 = $33,500: it drops too, from $43,500, but only by the $10,000 of lost employer contribution, because the flat employee deferral doesn't shrink with the salary. That's the cushion, a SEP lives entirely on the percentage and takes the full hit, while the Solo 401(k)'s deferral holds the line.

This is exactly why I don't set a client's reasonable salary in a vacuum. The salary drives payroll tax, the qualified business income deduction, and the retirement contribution all at once, and the right number balances them. If you've already elected S-Corp status, or you're weighing it. My Florida S-Corp guide walks through how the reasonable-compensation decision gets made.

Not sure which plan fits your numbers?

The right answer depends on your salary, your entity, and how much you actually want to set aside. I'll run both for your situation on a 30-minute discovery call.

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Setup, deadlines, and paperwork

This is where the SEP earns its keep. A SEP IRA has no plan document to maintain and no annual government filing, ever. You can open one and fund it as late as the due date of your business return, including extensions, which means a SEP can be set up after year-end, once you see the final numbers, and still count for the prior year. For a procrastinator or a one-time high-income year, that retroactive funding window is genuinely useful.

A Solo 401(k) asks for a bit more. There's a plan document to adopt, and the SECURE Act now lets you establish the plan as late as your business return due date (including extensions) for the prior year, so the old "must open it by December 31" rule has loosened considerably. The one ongoing chore: once your plan's assets reach $250,000 at year-end, you have to file a Form 5500-EZ each year. It's a short, information-only return, but miss it and the penalties are steep, so it's not optional once you cross that line. Below $250,000 in assets, there's no filing at all.

In plain terms: if you'll fund a few thousand dollars a year and never want to think about a form, the SEP's simplicity is a real feature. If you're trying to maximize what you shelter, the Solo 401(k)'s paperwork is a small price for a much bigger deduction, and a 5500-EZ once you're over $250k is not a heavy lift. For the full picture across plan types, see my retirement plan decision tree.

Roth contributions and loans

Two more features tilt toward the Solo 401(k) for people who want flexibility.

Roth. A Solo 401(k) can include a Roth bucket if the plan document provides for it. You contribute after-tax dollars now and the growth comes out tax-free in retirement. That's valuable if you expect to be in a higher bracket later, and there's no income cap on Roth 401(k) contributions the way there is on a Roth IRA. SEPs were traditionally pre-tax only; a Roth SEP option became permissible under SECURE 2.0, but very few custodians actually offer it yet, so in practice you shouldn't count on it.

Loans. A Solo 401(k) can allow participant loans (again, if the plan document permits). You can borrow from your own balance and pay yourself back with interest. A SEP, because it's built on an IRA, can never make loans. I don't love retirement-plan loans as a habit, but having the option on a Solo 401(k) is a meaningful backstop that a SEP structurally can't offer.

The mistakes I see most

The errors that cost self-employed owners the most when they set one of these up without a CPA looking at the whole picture:

Opening a Solo 401(k) when you have employees

A Solo 401(k) is strictly for an owner-only business (you, and a spouse who works in it). The moment you hire a non-spouse employee who meets the participation rules, you've outgrown it. A SEP goes the other way. It covers employees, but it forces you to contribute the same percentage of pay for every eligible one, which gets expensive fast once you have staff. If you're about to hire, that changes the plan choice entirely.

Using 25% of net profit for a sole proprietor

The "25% of compensation" figure is clean for an S-Corp owner with W-2 wages, but a sole proprietor applies it to net self-employment earnings after backing out the SE-tax adjustment and the contribution itself, which works out to about 20%, not 25%. People run the 25% number, over-contribute, and then have to withdraw the excess to avoid a penalty.

Colliding with a day-job 401(k)

If you run a side business and also have a W-2 job with a 401(k), the employee deferral limit ($23,500 in 2025) is a single per-person cap across both plans. You don't get a fresh one for the side business. The employer profit-sharing piece from your self-employment is separate, but the deferral isn't. Double-deferring is a correction waiting to happen.

Missing the funding or establishment window

The deadlines have loosened, both plans can generally be established and funded by the business return due date including extensions, but "looser" isn't "unlimited." Assuming you have all year to fund the prior year, then missing the extended deadline, forfeits the deduction. I tie the contribution to the return so it actually gets made on time.

Forgetting the Form 5500-EZ at $250k

Once a Solo 401(k)'s assets hit $250,000 at year-end, the annual Form 5500-EZ becomes mandatory. It's a short return, but the late-filing penalties are severe, and plenty of owners sail past the threshold without realizing a filing requirement just switched on.

How I set this up for clients

For most of the established S-Corp owners I work with, the Solo 401(k) is the default recommendation, the bigger contribution and the Roth and loan flexibility outweigh a once-a-year form. I steer clients to a SEP mainly when they want zero administration, they're funding modestly, or they need to retroactively set up a plan after a surprise high-income year and don't have a Solo 401(k) already open.

The piece that needs a CPA, not just a brokerage account, is the coordination. Your salary, your retirement contribution, your qualified business income deduction, and your quarterly estimates all move together, set one without looking at the others and you usually leave money on the table. Because I handle both the books and the return, I size the contribution against your actual year as it unfolds, not as a guess in April. (And since the employer contribution rides on your W-2 wages, this dovetails with how I handle quarterly estimated taxes for S-Corp owners.)

If you're trying to decide between a Solo 401(k) and a SEP, or you suspect your current plan is leaving room on the table. I'm in Mount Dora and work with self-employed clients and S-Corp owners across Lake County, Seminole County, and remotely throughout Florida. The first conversation is a 30-minute discovery call, and the contribution figures in this guide are current as of the 2025 and 2026 tax years.

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Frequently asked questions

Which lets me contribute more, a Solo 401(k) or a SEP IRA?: At almost any income below roughly $280,000 of compensation, the Solo 401(k) wins, often by a wide margin. It adds an employee salary deferral ($23,500 in 2025, $24,500 in 2026) on top of the same 25%-of-compensation employer contribution a SEP offers. Example: on an $80,000 S-Corp salary, a SEP maxes at $20,000 while a Solo 401(k) reaches $43,500. The two only converge at high income, where 25% of compensation already maxes the plan on its own.
I'm an S-Corp owner, what is my contribution based on?: Your W-2 wages, not your distributions. For both a SEP and a Solo 401(k), the employer contribution is 25% of your salary only, the distributions you take to save self-employment tax do not count toward retirement. That means the low salary you might choose to minimize payroll tax also caps your retirement contribution, so the two decisions have to be made together. The Solo 401(k) cushions a low salary better because its employee deferral is a flat dollar amount, not a percentage.
Can I have both a SEP IRA and a Solo 401(k)?: You can open both, but for the same business it rarely helps: the employer contributions across both plans share a single overall per-person limit ($70,000 in 2025, $72,000 in 2026, before catch-up), so a second plan does not double your room. For most owners it is cleaner to pick one. The exception worth a conversation is when you have genuinely separate, unrelated businesses, then the limits can apply per business.
What are the setup deadlines for each plan?: A SEP IRA can be set up and funded as late as your business return due date, including extensions, so you can open one after year-end and still claim it for the prior year. A Solo 401(k) can now also be established by the business return due date with extensions under the SECURE Act, a change from the old December 31 deadline. The Solo 401(k) does require a one-time plan document, and an annual Form 5500-EZ once plan assets reach $250,000.
Does a Solo 401(k) require an annual tax filing?: Only once the plan holds $250,000 or more in assets at year-end, at that point you file a Form 5500-EZ each year, a short information-only return. Below $250,000 there is no filing. A SEP IRA never requires a 5500 filing at all, which is its main advantage in simplicity. The 5500-EZ is straightforward, but the late-filing penalties are steep, so it is not something to skip once you cross the threshold.

Timothy LeGendre CPA LLC | Florida CPA License #AC62625 (firm #AD72267) | Mount Dora, FL | (407) 417-1064 | Contact