Solo 401(k) vs SEP-IRA Calculator

• Uses the published contribution limits for the tax year, not rounded approximations.
• Calculates the deductible half of self-employment tax properly, because it sets the contribution base.
• Shows why the SEP rate is 20% of net earnings rather than the 25% everyone quotes.
• Includes catch-up contributions, which exist in a Solo 401(k) and not in a SEP at any age.

How to use this calculator

Enter your net profit from self-employment — Schedule C line 31, which is revenue less business expenses and before any retirement contribution. Add your age, since catch-up contributions start at 50 and are larger between 60 and 63.

If you also have a job with a 401(k), enter the wages and any deferrals you have already made there. Both matter: wages use up part of the Social Security wage base and so change your self-employment tax, and deferrals elsewhere consume the same personal elective limit.

The result shows the maximum under each plan and the gap between them, along with a table of what both allow across a range of profits — which is the fastest way to see where the two converge.

How the limits are calculated

Self-employment tax = computed on 92.35% of net profit
Net earnings        = net profit − half of self-employment tax

SEP-IRA        = 20% of net earnings
Solo 401(k)    = employee deferral + 20% of net earnings
                 (total capped at the defined-contribution limit,
                  plus catch-up above it if aged 50 or over)

The 20% is the part that confuses everyone. A SEP allows 25% of compensation, but for a sole proprietor the contribution itself reduces compensation. Solving that circularity gives 25 ÷ 125 = 20% of net earnings before the contribution. The published 25% and the effective 20% describe the same rule from different starting points.

Note also which figure the 92.35% factor applies to. It belongs to the self-employment tax calculation, not to the retirement plan base. The plan's compensation is net profit less the deductible half of self-employment tax — the factor has already done its work by then.

A worked example

A sole proprietor with $120,000 of net profit and no other job pays about $16,955 in self-employment tax, half of which — $8,478 — is deductible. Net earnings for plan purposes are therefore $111,522.

A SEP-IRA allows 20% of that: $22,304. A Solo 401(k) allows the same $22,304 as the employer contribution, plus the full employee deferral on top — $24,500 — for a total of $46,804. The gap is exactly the deferral.

Raise the profit to $400,000 and both plans reach the same $72,000 overall limit, because 20% of net earnings alone gets there. At 55, the Solo 401(k) adds $8,000 of catch-up above that ceiling, reaching $80,000; the SEP stays at $72,000, because a SEP has no catch-up provision at any age.

What actually decides it

On contribution room alone, the Solo 401(k) wins at every profit level below the point where both max out, and ties above it. If that were the whole story there would be no decision.

The SEP's advantages are administrative. There is no plan document to adopt, no Form 5500 until assets pass $250,000, and — most usefully — it can be established and funded right up to the extended filing deadline. A Solo 401(k) normally has to exist before the end of the plan year, even though it can be funded later. People discovering this in April end up in a SEP by default.

Two other things settle it more often than the numbers do. A SEP generally requires the same contribution percentage for every eligible employee, which can make it prohibitive once you hire. And SEP balances count toward the pro-rata rule on IRA conversions, which can make a backdoor Roth contribution partly taxable; Solo 401(k) balances do not.

Assumptions and limitations

• Sole proprietor assumed. An S-corporation owner's limits are based on W-2 wages, which is a different calculation entirely.
• No employees. A Solo 401(k) is only available with no employees other than a spouse, and a SEP generally requires proportional contributions for eligible staff.
• Traditional treatment only. Roth Solo 401(k) deferrals are permitted by many plans and change the tax picture rather than the limits.
• One year at a time. No projection of balances or growth.
• Federal only. State treatment of contributions is not modelled.

Common mistakes

Using 25% of net profit for a SEP. It is 20%, and of net earnings rather than net profit. The error typically overstates the allowable contribution by a quarter.

Double-counting the elective deferral. The limit is per person, not per plan. Deferrals at an employer's 401(k) reduce what is left for a Solo 401(k), though the employer profit-sharing side is unaffected.

Missing the plan-establishment deadline. The single most common reason a self-employed person ends up contributing far less than they could have.

Expecting a contribution to reduce self-employment tax. It does not. Social Security and Medicare are computed before any retirement contribution, so the saving is income tax only.

Frequently asked questions