Take a hypothetical 52-year-old independent consultant with $100,000 of net profit on Schedule C in 2026 and no employees. Here is how much she could shelter in a solo 401(k), using the 2026 limits the IRS announced in late 2025:
| Step | Calculation | Amount |
|---|---|---|
| Self-employment tax | $100,000 × 92.35% × 15.3% | ≈ $14,130 |
| Deductible half of SE tax | $14,130 ÷ 2 | ≈ $7,065 |
| Adjusted net earnings | $100,000 − $7,065 | ≈ $92,935 |
| Employer contribution | 20% of $92,935 | ≈ $18,587 |
| Employee deferral | 2026 limit | $24,500 |
| Age-50+ catch-up | 2026 limit | $8,000 |
| Total | ≈ $51,087 |
The same consultant could put only about $18,587 into a SEP IRA, because a SEP has no employee deferral and no catch-up. That gap of more than $32,000 a year is the whole reason solo 401(k)s exist.
Two hats, two contributions
A solo 401(k), sometimes called an individual 401(k) or one-participant 401(k), is a regular 401(k) plan that covers only a business owner, plus the owner’s spouse if the spouse works in the business. Because you are both the business and its only worker, you contribute in two capacities.
The employee deferral
As the employee, you can defer up to $24,500 of earned income in 2026, or 100% of compensation if that is lower. Workers 50 and older can add an $8,000 catch-up, and those aged 60 through 63 get a larger catch-up of $11,250 instead. The deferral can be pre-tax or, if the plan offers it, Roth.
The $24,500 limit is per person, not per plan. If you also have a 401(k) at a day job and defer $15,000 there, only $9,500 of employee deferral room is left for your solo plan.
The employer contribution
As the employer, the business can contribute up to 25% of W-2 pay if you run an S corporation or C corporation and pay yourself a salary. For sole proprietors and single-member LLCs taxed as sole proprietors, the math lands at an effective 20% of net earnings after subtracting half of self-employment tax, as in the table above.
The overall cap
Employee and employer contributions combined cannot exceed $72,000 for 2026, not counting catch-up contributions. The IRS lays out these rules on its one-participant 401(k) page.
How the numbers shift at different incomes
The employee deferral is what makes a solo plan so strong at modest incomes. At a hypothetical $40,000 of net profit, a SEP would allow roughly $7,400. A solo 401(k) allows that same employer amount plus up to $24,500 of deferral, as long as total deferrals do not exceed your earned income after the SE-tax adjustments.
At high incomes the advantage narrows. Once profit is large enough that 20% of adjusted earnings alone approaches $72,000, the SEP and the solo 401(k) end up near the same cap, and the solo plan’s edge comes mainly from catch-up contributions and the Roth deferral option.
A working spouse on the payroll doubles the household’s room: the spouse gets an employee deferral and an employer contribution of their own, based on their pay from the business.
Who qualifies and who doesn’t
You need self-employment income, from a full-time business or a side gig. You cannot have common-law employees who would be eligible for the plan. Your spouse is fine. Part-time workers can become a problem: under SECURE 2.0 rules, employees who work at least 500 hours in consecutive years may become eligible to make deferrals, which would end the plan’s “solo” status and bring nondiscrimination testing into the picture. If you plan to hire, talk to the provider before the first employee starts.
Independent contractors you pay on a 1099 are not employees and do not count.
Deadlines that matter
- Setting up the plan: under the SECURE Act, a new plan can be adopted as late as your tax return due date, including extensions, and still accept employer contributions for that prior year.
- First-year employee deferrals: SECURE 2.0 lets a sole proprietor with no employees make employee deferrals for the plan’s first year up to the return due date, without extensions.
- Later years: the deferral election generally has to be made by December 31 of the tax year, even if the money is deposited later. Employer contributions can be made up to the return deadline, including extensions.
Provider rules vary on how quickly you can open an account, so start well before any deadline.
The paperwork, honestly assessed
A solo 401(k) asks more of you than a SEP, but not much more.
- A plan document. Brokerages that offer solo 401(k)s supply a prototype plan document you sign at account opening. You keep it in your records.
- An EIN. Most providers require an employer identification number, which you can get free from the IRS online in a few minutes.
- Form 5500-EZ. Once plan assets exceed $250,000 at the end of a plan year, you must file this annual return with the IRS. You also file one in the year you terminate the plan. Late-filing penalties are steep, though the IRS runs a penalty-relief program for late filers.
- Record keeping. You need to track which contributions are employee deferrals and which are employer contributions, and which tax year each one applies to. Label deposits clearly with your provider.
Features vary by provider. Some do not offer a Roth option, some do not accept incoming rollovers, and few allow plan loans without extra paperwork. If you want to consolidate an old workplace plan, our 401(k) rollover guide explains how to move it, and you should confirm the solo plan accepts roll-ins first.
A note on Roth catch-up rules
Starting in 2026, SECURE 2.0 requires catch-up contributions to be made as Roth for workers whose prior-year FICA wages from the plan sponsor exceeded $150,000. Sole proprietors generally pay self-employment tax rather than FICA wages, so this rule usually does not reach them, but S corporation owners who pay themselves a large W-2 salary may be affected. Ask your provider or tax preparer how it applies to your setup.
Is it worth the paperwork?
For most self-employed people without employees, yes. If your net profit is below roughly $300,000 or you are 50 or older, the solo 401(k) lets you save meaningfully more than a SEP, and the Roth deferral option adds tax flexibility a SEP may not give you. The extra work is a one-time plan setup, careful labeling of deposits and, once the account grows past $250,000, a short annual filing.
A SEP IRA still makes sense if you already missed the deferral deadline for the year, you have or expect to hire eligible employees, or your income is high enough that the employer contribution alone reaches the cap and you value the simplest possible setup. Some business owners use a SEP for a late first year, then switch to a solo 401(k) going forward.
