If you earn 1099 or self-employment income, whether from consulting, freelancing, or a weekend side hustle, you are not limited to a $7,500 IRA. Two powerful accounts, the solo 401(k) and the SEP-IRA, let self-employed savers shelter tens of thousands of dollars a year. Choosing between them, and meeting the right deadline, can dramatically change your tax bill.
How Each Plan Works
Both accounts are designed for business owners with no full-time employees other than a spouse, but they build contributions differently.
- SEP-IRA: employer-only contributions up to 25% of net self-employment income, capped at $70,000 for 2026.
- Solo 401(k): combines an employee deferral (up to $23,500 in 2026, plus catch-up if 50+) with an employer contribution of up to 25% of compensation.
- Roth option: solo 401(k)s can offer a Roth source; traditional SEP-IRAs generally cannot.
Why the Solo 401(k) Often Wins at Lower Incomes
Because the solo 401(k) lets you contribute an employee deferral first, you can reach large contributions on modest side income. A part-timer earning $30,000 could defer most of it, while a SEP-IRA would cap the contribution near 25% of net earnings. At high incomes both can hit the $70,000 employer-side ceiling.
The Deadline That Trips People Up
Timing rules differ and catch many savers off guard.
- A SEP-IRA can be opened and funded up to your tax-filing deadline, including extensions, for the prior year.
- A solo 401(k) generally must be established by December 31 of the tax year to make employee deferrals for that year, though employer contributions may follow later.
- Miss the year-end setup and you lose the deferral option for that year entirely.
Other Factors to Weigh
Solo 401(k)s allow loans and Roth contributions but carry more paperwork, including a Form 5500-EZ once assets exceed a threshold. SEP-IRAs are simpler to administer but offer no loans, no Roth, and no employee deferral.
Watch the Employee Cap Across Jobs
One trap catches people who freelance while also holding a W-2 job. The employee deferral limit, $23,500 in 2026, is a single limit across all 401(k) plans you participate in, including a workplace plan. So if you already defer the maximum at your day job, you cannot make additional employee deferrals into a solo 401(k); you can still make the employer profit-sharing contribution of up to 25% of your self-employment compensation. Understanding this split prevents an excess-deferral problem that can be messy to unwind.
- The employee deferral limit is shared across all your 401(k) accounts.
- The employer contribution is calculated separately per business.
- A high earner with a maxed workplace plan can still profit-share into a solo 401(k).
The Bottom Line
For most side-income earners who want maximum flexibility and Roth access, the solo 401(k) is the stronger choice, provided it is opened before year-end. The SEP-IRA remains a simple, last-minute option. Because self-employment contribution math is nuanced, confirm your exact limits with a tax professional before funding either account.