Retirement · Self-Employed · IRS Pub. 560 · 2025 Limits
Enter your net Schedule C income to see your maximum SEP IRA and Solo 401(k) contributions side by side. Uses 2025 IRS limits from Publication 560 and the IRS earned income formula for self-employed workers.
The Solo 401(k) allows significantly higher contributions than a SEP IRA at lower and mid-range incomes because it adds an employee salary deferral on top of the employer profit-sharing contribution. Both plans use the same employer formula: 20% of net self-employment earnings after the SE deduction. The Solo 401(k) adds up to $23,500 in employee deferrals (more with catch-up contributions). At incomes below approximately $380,000, the Solo 401(k) allows more. Above that level, both plans reach the $70,000 annual limit.
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| 2025 annual limit | $70,000 Confirmed | $70,000 / $77,500 / $81,250 Confirmed |
| Employee salary deferral | None | $23,500 (under 50) |
| Catch-up, age 50–59 and 64+ | None | $7,500 |
| Enhanced catch-up, age 60–63 (SECURE 2.0) | None | $11,250 |
| Reduces self-employment tax | No Confirmed | No Confirmed |
| Roth contribution option | No | Yes (employee deferral only) |
| Participant loans | No | Plan-dependent |
| Eligible participants | All eligible employees | Owner + spouse only |
| Plan setup deadline | Tax return due date + extensions | December 31 of tax year |
| Annual IRS filing (Form 5500-EZ) | Not required | Required if plan assets exceed $250,000 |
The crossover point where both plans reach the same $70,000 limit occurs at approximately $380,000 in net Schedule C profit. Below that level, the Solo 401(k) allows more. Above that level, both plans are capped equally.
| Net SE Profit | SEP IRA Max | Solo 401(k) Max | Solo Advantage |
|---|---|---|---|
| $40,000 | $7,241 | $30,741 | +$23,500 |
| $80,000 | $14,870 | $38,370 | +$23,500 |
| $120,000 | $22,304 | $45,804 | +$23,500 |
| $175,000 | $32,261 | $55,761 | +$23,500 |
| $246,000 | $45,869 | $69,369 | +$23,500 |
| $280,000 | $52,432 | $70,000 (capped) | +$17,568 |
| $350,000 | $66,879 | $70,000 (capped) | +$3,121 |
| $380,000+ | $70,000 (capped) | $70,000 (capped) | Equal |
Figures assume Single filing status, Under 50. Use the calculator above for your exact income and age group.
Both the SEP IRA and Solo 401(k) employer contribution use the same IRS formula from Publication 560. The formula is circular because the contribution itself reduces the compensation base. The IRS resolves this by using an effective rate.
SE tax applies to 92.35% of net Schedule C profit. For 2025, the rate is 12.4% on the first $176,100 of the SE base (Social Security) plus 2.9% on all of it (Medicare). The 92.35% factor accounts for the fact that employees do not pay FICA on the employer's matching share.
The deductible half of SE tax (50%) appears on Schedule 1, line 15. This reduces your adjusted gross income and your compensation base for retirement plan purposes. It does not reduce SE tax itself.
Net earnings for retirement plan purposes equals net Schedule C profit minus the SE deduction. This is the compensation base for the employer contribution calculation.
Because the contribution itself reduces compensation, the IRS directs self-employed individuals to use a reduced rate. A 25% plan becomes an effective 20% rate. This is derived algebraically: 0.25 ÷ 1.25 = 0.20.
Result: employer contribution = min(net earnings for retirement × 0.20, $70,000).
For a Solo 401(k) only, an employee salary deferral is added to the employer contribution. This deferral is limited to 100% of net SE earnings and the applicable dollar limit ($23,500 for under-50 in 2025). It cannot push the total above the annual additions limit.
| Parameter | Value | Source |
|---|---|---|
| SEP IRA annual limit | $70,000 | IRS Rev. Proc. 2024-40 |
| Solo 401(k) annual additions limit (under 50) | $70,000 | IRS Rev. Proc. 2024-40 |
| Solo 401(k) employee deferral (under 50) | $23,500 | IRS Rev. Proc. 2024-40 |
| Catch-up, age 50–59 and 64+ | $7,500 | IRS Rev. Proc. 2024-40 |
| Enhanced catch-up, age 60–63 (SECURE 2.0) | $11,250 | IRC §414(v)(2)(E)(ii) |
| SS wage base 2025 | $176,100 | SSA.gov |
| SE factor | 92.35% | IRS Schedule SE |
| Effective employer rate (self-employed) | 20% | IRS Pub. 560, Ch. 5 |
| SEP max compensation for 25% calculation | $350,000 | IRS Rev. Proc. 2024-40 |
Assumptions used in this calculator:
Sarah is a freelance graphic designer. Her 2025 net Schedule C profit is $120,000. She is 38 years old and files as Single. Here is how each plan compares for her.
The Solo 401(k) lets Sarah contribute $23,500 more and save approximately $5,170 more in federal taxes for 2025. The employer portion is identical for both plans. The entire advantage comes from the employee deferral that only the Solo 401(k) offers.
Sarah must establish her Solo 401(k) by December 31, 2025. She can fund it up to October 15, 2026 (return due date with extension).
Most self-employed clients earning under $200,000 in net Schedule C profit see a clear Solo 401(k) advantage. At $120,000, the Solo 401(k) allows $23,500 more per year in contributions. Over ten years, that gap compounds into a meaningful retirement account difference, even before accounting for investment growth.
We typically recommend the SEP IRA only when a client plans to hire non-spouse employees within the next two years, or when they missed the December 31 Solo 401(k) setup deadline. The SEP IRA's flexibility on the setup deadline catches a lot of clients who discover the Solo 401(k) too late in the tax year.
The Form 5500-EZ filing requirement kicks in for Solo 401(k) plans once assets exceed $250,000. That filing is not complex but it is easy to forget. We calendar it for every client as soon as their plan crosses the threshold.
Use the calculator above to compare maximum contributions at your actual income and age group. The Solo 401(k) wins at most income levels, but verify whether you are eligible based on your employee situation and setup deadline.
To understand the self-employment tax that applies to your income before running this calculator, use the Self-Employment Tax Calculator. For the complete federal tax picture combining SE tax, income tax, and quarterly estimate penalties, use the 1099 Tax Calculator. If you are weighing the broader LLC vs S-corp question alongside your retirement plan choice, see the LLC vs S-Corp Calculator.