Why a retirement plan matters more when you’re self-employed
Nobody offers you a 401(k) match when you work for yourself. But the IRS lets you open your own plan, and contributions for yourself are deducted on Schedule 1 (Form 1040), line 16, lowering your income tax. The two most popular options are the SEP IRA and the solo 401(k) (also called a one-participant 401(k)).
The 2026 limits
- SEP IRA: up to 25% of compensation, which for a self-employed person works out to about 20% of net earnings (profit minus the deductible half of self-employment tax), up to $72,000.
- Solo 401(k): two contributions that add up.
- As the employee: up to $24,500, plus a catch-up of $8,000 if you are 50 or older ($11,250 if you are 60 to 63).
- As the employer: the same 20% of net earnings as a SEP.
- Total: up to $72,000, or $80,000 with the age-50 catch-up ($83,250 at ages 60 to 63).
- Compensation above $360,000 does not count for either plan.
How much you can contribute
For a single person age 40 with no other retirement plan:
| 2026 profit | SEP IRA maximum | Solo 401(k) maximum |
|---|---|---|
| $30,000 | $5,576 | $26,190 |
| $60,000 | $11,152 | $35,652 |
| $100,000 | $18,587 | $43,087 |
The employee deferral is what makes the difference: with a solo 401(k), someone with a modest profit can shelter far more. The figures follow the IRS worksheet for self-employed people in Publication 560.
Side by side
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Who can open one | Any self-employed person, with or without employees | A business owner with no employees other than a spouse |
| Contributions | Employer contributions only | Employee deferrals + employer contributions |
| Roth option | Depends on the provider | Roth deferrals are common |
| Deadline to open | Your tax return due date, including extensions | For a sole proprietor with no employees, the first year’s plan can be adopted by the return due date (without extensions) |
| Deadline to contribute | Return due date, including extensions | Ask your provider: the employee deferral election usually has an earlier deadline than employer contributions |
| Paperwork | Very little (often IRS Form 5305-SEP) | A plan document; Form 5500-EZ once plan assets exceed $250,000 |
| Loans | No | Allowed by some plans |
Which one to choose
- A SEP IRA is simpler. If your profit is high enough that 20% of it reaches the amount you want to save, or you decide late (even after the year ends), a SEP is usually enough.
- A solo 401(k) lets you save more at low and middle profits, thanks to the employee deferral, and often offers a Roth option.
- If you might hire employees soon, compare the rules for covering them before you pick.
You can also contribute to a traditional or Roth IRA on top of either plan: up to $7,500 in 2026 ($1,100 more if you are 50 or older), subject to the IRA’s own income rules.
How much tax it saves
A single freelancer with $60,000 of profit who puts $5,000 into a SEP IRA or solo 401(k) pays about $480 less federal tax for 2026, if the contribution is pre-tax (Roth contributions do not lower this year’s tax). The money then grows tax-deferred until retirement, when withdrawals are taxed as income (unless they are qualified Roth withdrawals).
The saving is less than the contribution times your tax bracket because the contribution also reduces your qualified business income deduction, and it does not lower self-employment tax. To see your full tax picture, use our 1099 tax calculator. If you pay for your own health insurance, that is another deduction outside Schedule C: see the self-employed health insurance deduction.
This guide explains the tax rules; it is not investment advice. For choosing a provider or investments, consider a fee-only financial planner.