SEP-IRA or Solo 401(k) in 2026: How Much You Can Contribute at Each Profit, and Why It Isn't 25%

Self-employed people are told they can put “25% of income” into a SEP-IRA or up to $72,000 into a solo 401(k) for 2026. Neither number is what you can actually contribute. Because your own contribution reduces the earnings it is a percentage of, IRS Publication 560 has a special worksheet for sole proprietors, and the answer for a SEP is about 20% of profit less half of your self-employment tax, a bit under 19% of profit. A solo 401(k) can allow much more at low and middle profits. This guide works the worksheet with the same engine as the Self-Employment Tax Calculator.

Why it is not 25%

A SEP lets an employer contribute up to 25% of an employee's pay (Pub. 560, chapter 2). For a sole proprietor, “pay” means net earnings from self-employment, and that is after two deductions: half of your self-employment tax, and the contribution itself. The contribution depends on net earnings, which depend on the contribution, so the IRS solves it with a reduced rate: the plan rate divided by one plus the plan rate (Rate Worksheet for Self-Employed). For 25% that is 0.2, so you can contribute 20% of profit after half of the self-employment tax. At $100,000 of profit the half of self-employment tax is $7,065, so the SEP maximum is 20% of $92,935, or $18,587 (18.6% of profit). The 25% of compensation limit is capped at $360,000 of pay, and the whole contribution at $72,000: both are 2026 figures stated in Publication 560 and IRS Notice 2025-67.

What you can contribute at each profit

A single sole proprietor with no employees and no other income, under 50 (the last column adds the catch-up at 55). The income tax column is what the deduction saves in this estimate, with the 20% qualified business income deduction recomputed on the lower profit, in a state with no income tax:

Three patterns. A SEP is a fixed share of profit, about 18.6%, until it hits $72,000. A solo 401(k) is the SEP amount plus the deferral of up to $24,500, so at lower profits it allows a much larger share: the deferral can use nearly all of your earnings, which is why a freelancer with $20,000 of profit can put in $18,587 there and only $3,717 in a SEP. And above the dollar limit more profit buys nothing: the $72,000 cap is the same at $400,000 as at $377,000.

What it saves is not always the bracket rate

A deduction saves your marginal rate on each dollar, but two things bend that. The contribution lowers qualified business income, so it shrinks the 20% deduction too (the regulation counts the deduction for qualified plan contributions against QBI), which makes the saving smaller than the bracket rate, around 10 cents per dollar at $60,000 of profit. And near the top of the phase-in range for the QBI deduction it works the other way: at $300,000 of profit the same single filer saves 47 cents per dollar contributed, more than the 35% bracket, because lowering taxable income also brings back part of a deduction that the high income was phasing out. These are results of this engine's assumptions (a business with no employees or equipment, no other income); a different mix changes them, so use the calculator for your own figures. The contribution is a deferral: the money is taxed when it comes out, and taking it out before 59½ can bring the 10% additional tax.

Rules that catch people out

• Deadlines. A SEP can be set up for a year as late as the due date of your return (with extensions), and contributions must be made by then to be deducted for that year (Pub. 560, chapter 2). A solo 401(k) has its own setup and deferral deadlines; check Publication 560, chapter 4, and your plan documents before relying on a date.
• Employees. Contributions for employees are a business expense and, in a SEP, must be made for every eligible employee under the plan's formula (Pub. 560, chapter 2). The calculator treats you as the only participant.
• Roth money isn't deductible. A designated Roth deferral reduces nothing this year (Pub. 560, step 20 of the worksheet); the calculator assumes traditional contributions.
• Catch-up. At 50 or older a solo 401(k) adds $8,000 ($11,250 for those who turn 60 to 63 during the year), limited to the earnings left after your other contributions.