Solo 401(k) vs. SEP-IRA vs. Roth IRA: Retirement Math for a Handmade Business

A solo 401(k) shelters several times more of a small maker's income than a SEP-IRA does, and the gap is widest for the smallest businesses. The usual advice points the other way, and it starts from a number that is wrong: a SEP-IRA does not let you contribute 25% of your income. For a sole proprietor, the IRS's own rate table converts a 25% plan contribution rate into a self-employed rate of exactly 0.200000 (Publication 560 (opens in new tab), Rate Table for Self-Employed). Twenty percent, not 25%, and applied to a smaller number than you think.

That is not the interesting part. The interesting part is what the correction reveals once you put a solo 401(k) next to it. On $18,000 of net profit — a real number for a maker selling at weekend markets — a SEP-IRA maxes out at about $3,346. A solo 401(k) on that same $18,000 can absorb about $16,728, or roughly 93 cents of every dollar of net profit. Five times as much, for the smallest business in this article.

Retirement content tends to assume the reader has more money than time. This one assumes the opposite. Here is the math, the deadlines, and the point at which the answer changes.

The short version: Run one number — net earnings from self-employment. A SEP-IRA gives you 20% of it. A solo 401(k) gives you that same 20% plus an employee deferral of up to $24,500, which is why it wins at every income level and wins hugely below about $60,000. The one real advantage a SEP-IRA has is that you can open and fund it after the year has already ended. A Roth IRA is a separate $7,500 limit on top of either.

The number every plan is built on

Every contribution limit in this article is a percentage of the same figure, and it is not your revenue, your Schedule C net profit, or your take-home. It is net earnings from self-employment: your net profit, reduced by the deduction for one-half of your self-employment tax.

The IRS lays this out as the first three steps of the Deduction Worksheet for Self-Employed in Publication 560 (opens in new tab): start with net profit from Schedule C line 31, subtract your self-employment tax deduction from Schedule 1 line 15, and what remains is the base.

Self-employment tax runs 15.3% — 12.4% for Social Security and 2.9% for Medicare (IRS: Self-Employment Tax (opens in new tab)) — and it applies to 92.35% of net profit (Schedule SE (opens in new tab), line 4a), so the half you deduct works out to roughly 7.1% of net profit for anyone below the Social Security wage base.

Write down your own number before reading further. Everything below multiplies it.

Note: The Social Security portion of self-employment tax stops at an annually adjusted maximum. Above that ceiling the deductible half is a smaller share of profit, so the shortcut above overstates the deduction. All three examples here sit well below it.

Why "25% of income" is really 20%

The 25% figure is real; it is just not yours. A SEP allows a contribution of up to 25% of each employee's pay. When the employee is you, the IRS defines your compensation as net earnings from self-employment less two things: one-half of your self-employment tax, and the contribution itself (IRS: SEP Plans (opens in new tab)).

That is circular, and the circle has a closed-form answer. Twenty-five percent of a number that has already had the contribution removed works out to 25 ÷ 125 — 20% — of the number before removal. Publication 560 spares you the algebra with a lookup table:

So a maker with $48,326 of net earnings and a 25% plan rate contributes $9,665 — not the $13,000 that "25% of my income" suggested. That is $3,335 of imagined room, gone before the first account is opened. It is an easy overestimate to carry into a tax projection, and worth catching before you do.

The three accounts, side by side

Three vehicles are worth a maker's attention, and two of them do almost all the work.

First, the mechanic the whole comparison rests on. A sole proprietor with a solo 401(k) contributes in two separate capacities: as the employee, who elects to defer part of their own earnings, and as the employer, who makes a contribution on top of that. Each capacity has its own limit, and the two stack. A SEP-IRA only ever gives you the employer capacity — which is the entire reason the two accounts diverge so sharply at low incomes.

Every 2026 figure in that table comes from IRS Notice 2025-67 (opens in new tab), which set the elective deferral limit at $24,500, the age-50 catch-up at $8,000, and the defined contribution limit under section 415(c) at $72,000. The same notice sets a larger catch-up of $11,250, instead of $8,000, for participants who turn 60, 61, 62, or 63 during 2026. The IRA limit rose to $7,500 with a $1,100 catch-up (IRS: 401(k) limit increases for 2026 (opens in new tab)).

A fourth option, the SIMPLE IRA, is deliberately left out of that table. It exists so a small employer can cover a staff, it obliges that employer to contribute for eligible employees, and for a one-person shop it is worse than the solo 401(k) on every axis that matters. Its 2026 deferral limit is $17,000 with a $4,000 catch-up, also per Notice 2025-67 — quoted here only so you can rule it out with a number rather than on trust.

Two structural notes decide more cases than the headline numbers do:

• A SEP-IRA is employer money only. There is no employee deferral. That single fact is the whole story of why it loses to a solo 401(k) at low incomes.
• A solo 401(k) requires no employees. It covers a business owner with no employees, or that person and their spouse (IRS: One-Participant 401(k) Plans (opens in new tab)). Hire one part-time helper who meets the plan's eligibility rules and this stops being a solo 401(k) — a genuine reason to read the plan document before your first seasonal hire rather than after.

Three makers, three answers

The gap between the two serious options narrows as income rises. Watch what happens. Nadia, Marcus and Dana below are composite illustrations, not real sellers — the profit figures were chosen to show the math at three stages, not taken from anyone's return.

Nadia — screen-printed tea towels, $18,000 net profit

Nadia sells at four markets a month and one holiday show. Her net earnings from self-employment are $16,728.

Her SEP-IRA ceiling is 20% of that: $3,346.

Her solo 401(k) ceiling is the same $3,346 employer contribution, plus an employee deferral of whatever is left of her earned income. That comes to $16,728 in total — every dollar of the base. She almost certainly will not contribute all of it, because she also needs to eat. But the room is there, and it is five times the SEP's.

Nadia's decision is not close, and it runs against the account commonly recommended at her income. The SEP-IRA is marketed as the simple option for small businesses. For a business this small, simple costs her four-fifths of her available shelter.

Marcus — leather bags, $52,000 net profit

Marcus went full-time last year. His net earnings are $48,326.

Still not close: 3.5 times. Marcus is also the reader for whom the choice has a second dimension. At $52,000 he has enough income to care whether the deduction lands this year or the tax-free growth lands later, which is the traditional-versus-Roth question rather than the SEP-versus-solo one. A solo 401(k) can accept designated Roth deferrals, and since SECURE 2.0 — the 2022 federal retirement-law overhaul — a plan may also let the employer contribution be designated Roth, provided it is fully vested when the contribution is allocated and the designation is made no later than that allocation (IRS Notice 2024-2 (opens in new tab), section L). Roth employer money is included in gross income for the year it lands, so it buys future tax-free growth by giving up this year's deduction. He can split, in either capacity, if his plan document allows it.

Dana — soap and bath products, $110,000 net profit

Dana's net earnings are $102,229. Her SEP ceiling is $20,446; her solo 401(k) ceiling is $44,946.

The multiple has fallen to 2.2, and it keeps falling. At high enough profit the employer 20% alone reaches the $72,000 section 415(c) cap and the two plans converge — which is roughly where the standard advice was written, and why it fits so badly below that point.

Rule of thumb: The solo 401(k) wins on contribution room at every income. The only question is whether the extra room is worth the extra paperwork — and below roughly $60,000 of net profit, the extra room is most of your capacity.

The decision tree

Four questions, in order. Stop at the first one that gives you an answer.

1. Do you have employees other than a spouse? If yes, the solo 401(k) is off the table, and a SEP obliges you to contribute for anyone who meets the plan's eligibility rules. Talk to a CPA before choosing anything; this article stops being sufficient here. If no, go to Question 2.

2. Is it already past December 31 of the year you want to contribute for? If no, both accounts are open to you — go to Question 3. If yes, there are two branches. Where this would be your first-ever 401(k) plan, you are still inside the first-plan-year window described in the next section and can set up a solo 401(k) retroactively; go to Question 3 as normal. Where it would not, the SEP-IRA is your only real option for that year. Take it — a funded SEP beats a theoretically better plan you cannot legally use.

3. Is your net profit under about $60,000? If yes, choose the solo 401(k). The employee deferral is doing three-quarters of the lifting at this income, and skipping it costs you most of your capacity. This is Nadia and Marcus. If no, go to Question 4.

4. Will you actually contribute more than 20% of net earnings? If no, and you would rather do nothing than file anything, the SEP-IRA is a defensible choice — no Form 5500-EZ (opens in new tab), no deferral election, one form to open. If yes, solo 401(k). This is Dana.

Underneath all four, a Roth IRA is a separate $7,500 layer that most makers should fill first anyway, because contributions can come back out and the growth is never taxed. The IRA limit is capped by your taxable compensation for the year and phases out for higher incomes — between $153,000 and $168,000 for single filers, $242,000 and $252,000 for married couples filing jointly in 2026 (IRS: 401(k) limit increases for 2026 (opens in new tab)).

Deadlines are the real constraint

It is an easy trap to fall into: pick the right plan in April, then discover the window for it closed the previous December. The deadlines are not symmetrical, and they are the reason the theoretically-worse account is sometimes the correct one.

SEP-IRA — the late-decision account

You can set up a SEP plan for a year as late as the due date, including extensions, of your business's income tax return for that year, and that same deadline applies to depositing the contributions (IRS SEP FAQs (opens in new tab)). A sole proprietor on extension can open and fund a SEP in October for the year that ended nine months earlier. Nothing else here does that.

Solo 401(k) — the ahead-of-time account

The employee deferral is an election, and an election has to exist before the compensation it defers. In the ordinary case that means the plan and the deferral election need to be in place by December 31.

There is one exception, and it is worth reading carefully, because two different rules sit in the same provision and carry two different deadlines (26 U.S.C. §401(b)(2) (opens in new tab)). The first lets any employer adopt a plan after the close of a taxable year and treat it as adopted on that year's last day, up to the return due date including extensions. The second, added by Section 317 of the SECURE 2.0 Act, applies only to an individual who owns the entire interest in an unincorporated trade or business and is its only employee: elective deferrals made before the due date of their return, "determined without regard to any extensions," count as made before the end of the plan's first plan year.

So the adoption deadline gets extensions and the deferral deadline does not, and the deferral half is first plan year only. After that, December 31 is real.

IRA — the forgiving one

Contributions for a tax year run to the filing deadline, generally April 15, with no extension.

Pro tip: Read those three rules in reverse. If it is August and you are reading this, you still have time to open a solo 401(k) and make a deferral election before December — which is precisely the decision that becomes impossible in February.

Two rule changes worth knowing about

Both landed recently, and one of them is good news that keeps getting reported as bad.

The mandatory Roth catch-up almost certainly does not apply to you

Under the same 2022 law, higher earners must make their catch-up contributions as Roth. The threshold used for 2026 is $150,000, up from $145,000 (Notice 2025-67 (opens in new tab)), and the final regulations generally apply to contributions in taxable years beginning after December 31, 2026. What gets lost in the coverage is the definition: the threshold measures FICA wages from the employer sponsoring the plan. The final regulations state that someone with no FICA wages from that employer for the preceding calendar year — the worked example is a partner with only self-employment income — is not subject to the requirement (final catch-up contribution regulations, 90 FR 44534 (opens in new tab)). A sole proprietor pays self-employment tax on Schedule SE, not FICA wages on a W-2. There is nothing for the threshold to measure.

The rule also reads employer by employer. Someone with a $200,000 day job and a solo 401(k) on their maker income has no FICA wages from the maker business, which is the employer sponsoring that plan.

The Saver's Match arrives in 2027

For taxable years beginning after December 31, 2026, the federal government will pay a matching contribution of up to $1,000 directly into a retirement account for lower- and moderate-income savers — 50% of up to $2,000 contributed. Treasury and the IRS issued the first substantive guidance on August 7, 2026 in Notice 2026-48 (opens in new tab), which sets the phase-out beginning at $20,500 of modified adjusted gross income for single filers and ending at $35,500, and beginning at $41,000 and ending at $71,000 for married couples filing jointly.

Read that against Nadia's $18,000. A maker at that income who contributes $2,000 to a solo 401(k) in 2027 is in line for a $1,000 federal match on top of the deduction. That is the closest thing to free money in the self-employed retirement system, and the eligibility band sits exactly where a part-time handmade business does.

Until then, the Saver's Credit (opens in new tab) still applies — a credit worth 50%, 20%, or 10% of up to $2,000 in contributions, available for 2026 to single filers with income up to $40,250 and married couples filing jointly up to $80,500 (IRS: 401(k) limit increases for 2026 (opens in new tab)).

Your net profit is an input, not a fact

Every number in this article is downstream of one figure: Schedule C line 31. If that figure is wrong, so is your contribution limit, and the error runs in the expensive direction more often than not.

The usual cause is not fraud or laziness. It is that materials bought in one year get made into products sold in the next, and the cost of goods sold never gets untangled from the cost of goods bought. A maker who expenses every supply purchase in the year it happens understates profit in a heavy buying year and overstates it in a lean one — then bases a retirement contribution on both wrong numbers in turn. Overcontribute to a SEP-IRA and you have an excess contribution to correct; undercontribute and you simply left the room unused, which nobody sends you a letter about.

The fix is unglamorous: know what your materials cost, know what left the shelf, and let the difference be your cost of goods sold instead of a guess. That is most of what Ardent Seller does — track materials into finished goods, cost each batch from the actual purchase prices, and produce a year-end figure you can hand a preparer without a shoebox. If you are still reconstructing the year from bank statements each spring, the retirement decision is not your first problem.

What to do this week

Open last year's Schedule C and find line 31. Multiply it by 0.929 — that is 100% minus the roughly 7.1% self-employment-tax deduction from the first section — to get your net earnings from self-employment, then multiply that by 0.20. That second number is what a SEP-IRA would have allowed you. Now add $24,500 to it, capped at your net earnings figure, and you have what a solo 401(k) would have allowed.

For most makers reading this, the second number is several times the first, and the only thing standing between them is a plan document and a December deadline. If it is still summer where you are, that deadline is not a constraint yet. It becomes one on January 1.

Start tracking your true cost of goods with Ardent Seller so that when you run this math next spring, line 31 is a number you trust rather than a number you reconstructed.

Related reading

• Hobby vs. Business Taxes — Before any of this applies, the IRS has to agree you are running a business; this covers where that line sits and what records hold it.
• Health Insurance for Self-Employed Makers — The other benefit no employer is providing, and the 2026 rule changes that made estimating your income riskier than it used to be.
• Home Office Tax Deduction for Makers — A deduction that lowers the same line 31 these contributions are calculated from, and one that plenty of makers rule themselves out of by mistake.
• Should I Quit My Day Job? — The decision that turns a side business's retirement plan into your only retirement plan.

Free resources

Free companion downloads if you want to put any of this into practice:

• Schedule C Tax Expense Tracker — Gets line 31 to a number you can trust, which is the input every contribution limit in this article multiplies.
• Quarterly Estimated Tax Worksheet — A deductible retirement contribution changes what you owe in estimates; this is where you work out the new figure.
• Small Business Tax Deduction Cheat Sheet — The other deductions that move net profit before you take 20% of it.

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This article is provided for educational purposes only and does not constitute legal, tax, or accounting advice. Contribution limits, plan eligibility rules, and filing deadlines vary by circumstance and change frequently, and the examples here are illustrative. Consult a qualified CPA, tax preparer, or attorney before making decisions that affect your business.