SEP IRA
A SEP IRA is a retirement account funded entirely by the employer that lets self-employed people and small business owners put away up to 25% of compensation, capped at $72,000 for 2026, whichever is lower.
The pitch is administration: no annual Form 5500, no compliance testing, and you can open one at any major brokerage in an afternoon. Only the employer funds it — there are no employee salary deferrals, so the Roth deferral mechanism a 401(k) gives you simply isn't part of a SEP. If you're self-employed, the headline 25% is really closer to 20% of your net income, because the rate applies after you subtract the deduction for half your self-employment tax. Run the math on your actual net, not on a round 25% of gross.
The catch shows up the moment you have staff. Whatever percentage you contribute for yourself, you owe the same percentage for every eligible employee — someone who's worked for you in three of the last five years, is 21 or older, and earned at least $800 in 2026. Fund yourself at 20% and you're funding each of them at 20% too. For a solo operator that's a non-issue; for a five-person shop it's the whole decision.
Contributions are deductible and the account compounds tax-deferred, so you're trading tax today for tax in retirement. You can also decide the amount year to year — fund it heavily in a strong year, skip it entirely in a lean one, with no penalty for going dark. That flexibility is the real reason freelancers with uneven income reach for it over a plan that locks in a contribution schedule.
Where it loses is raw capacity. A Solo 401(k) lets you stack a $24,500 employee deferral (2026) on top of the same employer contribution a SEP allows, plus catch-up dollars if you're 50 or older. At most realistic income levels for a one-person business, the Solo 401(k) gets more money into the account than a SEP does, and it can hold Roth deferrals and permit loans — neither of which a SEP offers. The SEP only pulls even once you're earning enough that 25% of compensation already clears what the deferral would add.
One scheduling point worth banking: you fund a SEP by your business tax deadline including extensions, so a 2026 contribution can land as late as fall 2027. If you're staffing up next year, price out the matching obligation before you commit — a generous owner contribution can get expensive once it has to apply to everyone on payroll.
Practical Example
Lisa runs a freelance design business and nets $120,000 of self-employment income in 2026. Because she's self-employed, the 25% rate gets applied to her net income after the deduction for half her SE tax, not to the full $120,000. Her half-SE-tax deduction is about $8,500, leaving roughly $111,500, and 20% of that is about $22,300 — the contribution she can make for the year. In the 24% federal bracket, that knocks roughly $5,350 off her tax bill, and the money grows tax-deferred until she pulls it out in retirement.