If you are self-employed, a freelancer, or running a one-person business on Long Island, you do not get the employer-sponsored 401(k) that W-2 employees take for granted. The good news: you have two powerful options built specifically for you, and both let you shelter far more than a regular IRA. The two heavyweights are the SEP-IRA and the Solo 401(k).
They sound similar, and both reduce your taxable income today. But the way they let you contribute, and the features they offer, can produce very different results. Here is how to think about the choice.
How Each Plan Works
A SEP-IRA (Simplified Employee Pension) is exactly what its name suggests: simple. You open it at a brokerage, and the business makes contributions on your behalf. There is no annual IRS filing for the plan itself, and almost no paperwork. All contributions are treated as coming from the employer side of the equation.
A Solo 401(k) (also called an Individual 401(k) or One-Participant 401(k)) is a full 401(k) plan for a business with no employees other than the owner and a spouse. It is slightly more involved to administer, but it lets you contribute in two capacities: as the employee and as the employer. That dual role is the heart of why it often wins.
Contribution Limits: Where the Real Difference Lives
This is the section that decides most cases, so it is worth slowing down.
With a SEP-IRA, the business can contribute up to 25% of your compensation, capped at $70,000 for 2025. For an unincorporated sole proprietor, that 25% is calculated on net self-employment earnings after expenses and the deduction for half of self-employment tax, which works out to an effective rate of roughly 20% of net profit. There is no separate employee contribution: the percentage cap is the whole story.
With a Solo 401(k), you contribute in two parts:
- Employee deferral: up to $23,500 for 2025 ($31,000 if you are age 50 or older, thanks to the $7,500 catch-up), which you can put in regardless of how high your business profit is
- Employer profit-sharing: up to 25% of compensation, calculated the same way as the SEP
- Combined cap: $70,000 for 2025 ($77,500 with the age-50 catch-up), the same total ceiling as the SEP
The ceiling is identical, but the path to reach it is not. Because the Solo 401(k) starts with a flat $23,500 employee deferral before the percentage math begins, a self-employed person with moderate income can stash away far more than the SEP allows at the same profit level.
A quick example. Say your net self-employment profit is $60,000. A SEP-IRA caps you near $11,000 to $12,000 (roughly 20% of net). A Solo 401(k) lets you defer $23,500 as the employee plus the employer share on top, often $30,000 or more total. Same income, very different tax shelter.
Who Each Plan Fits Best
The right answer depends mostly on whether you have employees and how much you earn.
The SEP-IRA shines when you want maximum simplicity, when your income is high enough that 25% already gets you to the cap, or when you may hire staff. One caution: a SEP requires you to contribute the same percentage for every eligible employee that you contribute for yourself. If you grow a team, that can get expensive fast.
The Solo 401(k) shines for the true one-person business (or owner plus spouse) who wants to contribute the most possible at moderate income levels. The trade-off is that a Solo 401(k) generally cannot cover non-spouse employees. The day you hire your first full-time W-2 worker, the plan usually has to convert to a traditional 401(k) or be replaced. That makes it ideal for consultants, real estate agents, contractors, and creatives who plan to stay solo.
| Factor | SEP-IRA | Solo 401(k) |
|---|---|---|
| Employee + employer contributions | Employer only | Both |
| Max at moderate income | Lower | Higher |
| Roth option available | No | Yes (if plan allows) |
| Plan loans permitted | No | Yes (if plan allows) |
| Setup and paperwork | Very simple | More involved |
| Works with non-spouse employees | Yes | No |
Roth and Loan Features
Two features tilt many self-employed savers toward the Solo 401(k).
First, Roth contributions. Most Solo 401(k) plans now allow a Roth employee deferral, meaning you can pay tax on that portion today and take it out tax-free in retirement. A SEP-IRA is traditional (pre-tax) only, though SEP contributions are now permitted to be designated Roth under recent law if the provider supports it, which remains far less common. If tax-free growth matters to you, the Solo 401(k) is usually the cleaner route.
Second, plan loans. A Solo 401(k) can let you borrow from your own balance, generally up to 50% of the vested amount or $50,000, whichever is less. A SEP-IRA offers no loan feature at all: any early withdrawal is a taxable distribution, plus a 10% penalty if you are under 59 and a half. For an owner who values access to capital, that flexibility can be a deciding factor.
Deadlines to Open and Fund
Timing rules differ, and missing them is one of the most common mistakes we correct for new clients.
A SEP-IRA is wonderfully forgiving: you can open and fund it as late as your tax filing deadline, including extensions. That means a SEP for the 2025 tax year can often be established and funded as late as October 2026 if you extended. It is the classic last-minute option when a client realizes in the spring that they owe more than expected.
A Solo 401(k) is stricter on one point. Under the SECURE Act, you can now establish the plan up to your tax filing deadline (with extensions) and still make employer contributions for the prior year. However, the employee deferral portion generally must be elected by the end of the calendar year, December 31. So if you want that $23,500 employee piece for 2025, the plan and your deferral election usually need to be in place before year-end.
The planning takeaway: if you think a Solo 401(k) is your answer, decide before December 31. If you are not sure and want to keep your options open into next year, the SEP-IRA's extended deadline buys you time.
How a CPA Models the Choice
On paper the Solo 401(k) usually allows the larger contribution, but "usually" is not "always," and the best plan is the one matched to your actual numbers and your plans for the business. When we sit down with a self-employed client at JRH & Associates, we look at:
- Your projected net self-employment profit for the year, since that drives both the percentage cap and the employee-deferral math
- Whether you expect to hire employees in the next few years, which can rule a Solo 401(k) out
- Your marginal tax bracket now versus your expected bracket in retirement, which informs the traditional-versus-Roth decision
- Whether you might need a loan against the balance for business cash flow
- How the contribution interacts with your quarterly estimated taxes and your overall return
We then run the contribution both ways and show you the dollar difference in tax saved this year and the long-term balance projected at retirement. For many Long Island and Garden City business owners, that one conversation is worth thousands. You can read more on our retirement planning page, see the full range of what we handle on our services page, or contact us to model your own numbers.
This article is for informational purposes only and does not constitute tax, legal, or investment advice. Contribution limits and rules change, and every situation is different. Consult a qualified CPA before selecting or funding a retirement plan.