SEP IRA vs Solo 401(k) calculator for the self-employed

See which plan shelters more of your profit, and what it actually costs you.

If you are self-employed, a SEP IRA and a Solo 401(k) are the two ways to put serious money away — far more than an ordinary IRA allows. They are not interchangeable, and picking the wrong one can cost you thousands in contribution room every year.

Enter your expected net profit and this calculator works out the maximum for each plan, the tax you defer, and what the contribution really costs you out of pocket.

How the two plans actually differ

Both a SEP IRA and a Solo 401(k) let a self-employed person contribute far more than an ordinary IRA. The difference is in how much of that room you can use, and how early in your career you can use it.

A SEP IRA has one contribution source: your business contributes up to 20% of your net earnings from self-employment. That is it. There is no employee deferral, no Roth option, and almost no paperwork — you open it at any brokerage and contribute by your tax filing deadline.

A Solo 401(k) has two sources stacked on top of each other. You contribute as the employee — in 2025 that is $23,500, or $31,000 if you are 50 or older — and then your business contributes the same 20% of net earnings on top. Together they cannot exceed $70,000 or your net earnings, whichever is smaller.

That second sentence is the whole reason the Solo 401(k) usually wins. The employee deferral is a flat dollar amount, not a percentage, so it is worth proportionally more when your income is modest.

Why the 20% figure looks wrong

Nearly every article about SEP IRAs says "25%", and nearly every calculator quietly uses 20%. Both are right, and the confusion is worth untangling because it changes your number.

The 25% applies to your W-2 wages if you have an S-corp. The 20% applies to your net earnings from self-employment if you are a sole proprietor or single-member LLC — which is most freelancers. The two are reconciled by the deduction for half of your self-employment tax: contributing 25% of compensation equals 20% of net earnings, because net earnings are already reduced by that deduction.

This calculator takes your net profit, subtracts half of your self-employment tax to get net earnings, and applies 20% to that. If you pay yourself a W-2 salary from an S-corp, the maths is different and you should use your W-2 wages instead.

A concrete comparison

Say you clear $90,000 in net profit as a sole proprietor, filing single, under 50.

• Self-employment tax: $90,000 × 92.35% × 15.3% = $12,721. Half of that, $6,361, is deductible.
• Net earnings from self-employment: $90,000 − $6,362 = $83,638.
• SEP IRA: 20% × $83,638 = $16,728.
• Solo 401(k): $23,500 employee deferral + $16,728 employer contribution = $40,228.

The Solo 401(k) holds $23,500 more — and that extra room is exactly the employee deferral. At a 22% federal bracket plus 5% state, sheltering the difference defers about $6,345 in tax that a SEP IRA cannot touch.

Notice what happens as income rises. At $300,000 of net profit the employer contribution alone approaches the $70,000 ceiling, the two plans converge, and the decision stops being about contribution room.

What the tax saving is really worth

The "out-of-pocket cost" figure is the one most people get wrong. Contributing $40,228 does not cost you $40,228 — it costs you the contribution minus the tax you no longer pay. In the example above, a $40,228 contribution at a 27% combined rate costs roughly $29,366 in real terms. The government funds the other $10,862, which is why retirement contributions are the single largest tax lever available to a freelancer.

Two caveats. First, this is a deferral, not a saving — you pay tax on withdrawal, though usually at a lower rate in retirement. Second, contributions reduce your income tax but not your self-employment tax. There is no way to shelter self-employment tax through retirement contributions, whatever a social media thread tells you.

Which one to pick

Choose a SEP IRA if your net profit is high relative to the contribution limit, you value zero administration, you have no interest in a Roth option, or you want to decide as late as your filing deadline. SEP contributions can be made right up to your tax deadline, including extensions.

Choose a Solo 401(k) if your income is modest and you want to shelter a large share of it, you want a Roth option (many providers offer one), you want to borrow against the balance, or you are over 50 and the catch-up matters. The trade-off is paperwork: the plan must be established by December 31 of the tax year, and once assets exceed $250,000 you must file Form 5500-EZ annually.

That December 31 deadline is the one that catches people out. A SEP IRA can be opened in April for the prior tax year; a Solo 401(k) cannot. If you are reading this in December, the decision is time-sensitive.