Solo 401(k) or SEP-IRA: choosing a retirement plan for your practice in 2026

A practice owner with no employees can save for retirement through a SEP-IRA or through what the IRS calls a one-participant 401(k), also known as a solo 401(k), solo-k, or uni-k. For a therapist, psychologist, optometrist, dentist, or veterinarian choosing between them for 2026, the answer depends less on the plans in the abstract than on how the owner is taxed, when the decision is being made, and whether the practice has employees.

Both plans let the practice, as employer, contribute up to 25 percent of the owner’s compensation. The 401(k) adds a second contribution that the owner makes as an employee, the elective deferral, and that second layer accounts for most of the difference between them.

The 2026 limits

The IRS published the 2026 figures in Notice 2025-67. The elective deferral limit under section 402(g)(1) is $24,500. That limit applies per person, not per plan, so an owner who also defers into a 401(k) at another job in 2026 has to count those deferrals against the same $24,500. An owner who is 50 or older by the end of the year can add a catch-up contribution of $8,000, and an owner who reaches age 60, 61, 62, or 63 during 2026 has a higher catch-up limit of $11,250 instead. Both depend on the plan document, since a plan has to permit catch-up contributions, and the IRS says a plan may, but is not required to, include the higher limit for ages 60 to 63. The section 415(c) limit on annual additions to a defined contribution plan, which caps the year’s contributions to the owner’s account other than catch-up contributions (rollovers and investment earnings do not count against it), is $72,000. Compensation above $360,000 is disregarded under section 401(a)(17), and the minimum pay that makes an employee eligible for a SEP under section 408(k)(2)(C) is $800.

Catch-up contributions sit outside the $72,000 limit, so an owner aged 50 or over can reach $80,000 in a 401(k), and an owner aged 60 to 63 can reach $83,250, when compensation is high enough to support it. A SEP has no catch-up at all. The IRS’s own answer is that SEPs are funded by employer contributions only, and catch-up contributions apply only to employee elective deferrals.

What each plan allows

Under a SEP, the practice contributes to a SEP-IRA for the owner, and section 404(h)(1)(C) limits the deduction to 25 percent of compensation. Under a 401(k), the employer’s profit-sharing contribution has the same 25 percent limit under section 404(a)(3), and the owner’s elective deferral comes on top of it, because section 404(n) keeps elective deferrals out of that limit. Section 415(c) then caps the employer contribution and the deferral together at the lesser of $72,000 or 100 percent of the owner’s compensation.

Sole proprietors start from net earnings

For a sole proprietor, and for an owner whose single-member LLC is disregarded for tax purposes (Treasury Regulation section 301.7701-2(a) treats its activities in the same manner as a sole proprietorship), compensation for plan purposes is net earnings from self-employment. IRS Publication 560 measures that as net profit reduced by the deduction for half of self-employment tax and by the owner’s own plan contribution. Because the contribution and the earnings it is measured against depend on each other, Publication 560 converts the plan’s rate into a reduced rate for the owner, and a 25 percent plan rate becomes 20 percent. That is why the publication states the owner’s own SEP limit as 20 percent of net earnings from self-employment. The owner’s contributions are deducted on Schedule 1 of Form 1040, line 16, rather than on Schedule C.

Take a hypothetical sole proprietor under age 50 with no employees and $100,000 of net profit on Schedule C for 2026. Self-employment tax applies to 92.35 percent of that profit, or $92,350, at 12.4 percent for Social Security (the amount is under the 2026 wage base of $184,500) plus 2.9 percent for Medicare, which comes to $14,129.55. Half of that, $7,064.78 rounded to the cent, is deductible, which leaves $92,935.22 to carry into the Publication 560 worksheet. At the 20 percent rate, the maximum SEP contribution is $18,587.04. A solo 401(k) allows the same $18,587.04 employer contribution plus the full $24,500 deferral, $43,087.04 in all, because the worksheet’s other limits ($72,000 less the deferral, and half of net earnings after the deferral) are both higher than the employer amount at this income. The 401(k) allows $24,500 more, the whole deferral.

S corporation owners start from W-2 salary

An S corporation owner who works in the practice is its employee, and plan contributions are figured on the owner’s W-2 pay from the corporation, as the plan document defines compensation. Distributions do not count. The IRS states that distributions a shareholder receives from an S corporation do not constitute earned income for retirement plan purposes, and that salary deferrals and the employer’s contributions are based on Form W-2 compensation. When the owner’s health insurance premiums run through the W-2, they sit in box 1 alongside the salary, and whether they count toward the 25 percent depends on the plan’s definition. There is no self-employed reduction, so the employer contribution is a full 25 percent of salary, and under section 404(a)(12) the salary for this purpose includes the owner’s own deferrals.

For a hypothetical S corporation owner under age 50 paid a $100,000 salary in 2026, the maximum SEP contribution is $25,000. A solo 401(k) allows the same $25,000 plus the $24,500 deferral, $49,500 in all, which becomes $57,500 at age 50 or over and $60,750 at ages 60 to 63. With a solo 401(k), the $72,000 limit is reached at a salary of $190,000, since $24,500 plus 25 percent of $190,000 is $72,000. With a SEP alone, it takes a salary of $288,000.

The two parts of a 401(k) contribution are treated differently for payroll tax. Publication 560 notes that elective deferrals are still wages for Social Security and Medicare, while Notice 2024-2 explains that the employer’s nonelective contribution to a qualified plan is excluded from those wages under section 3121(a)(5). Neither point is a reason to move the salary. It has to be reasonable for the work the owner actually does, and the retirement contribution follows from it rather than setting it. How that figure is reached is covered in our post on salary for clinician-owners, and the general standard is in our post on reasonable compensation. A salary set low to save payroll tax also shrinks the base for every employer contribution.

The deadlines differ, and the S corporation owner’s comes first

Of the two, a SEP is more forgiving on timing. Publication 560 and the IRS’s SEP guidance allow a SEP to be set up for a year as late as the due date of the business’s return for that year, including extensions, and contributions for the year can be made by the same date. For calendar year 2026, a sole proprietor’s Form 1040 is due April 15, 2027, or October 15, 2027 with an extension. An S corporation’s Form 1120-S is due March 15, 2027 under section 6072(b), or September 15, 2027 with a Form 7004 extension.

A 401(k) can also be adopted after the year ends, for employer contributions. Section 201 of the SECURE Act added section 401(b)(2), under which an employer that adopts a plan after the close of a taxable year, but before its return due date including extensions, may elect to treat the plan as adopted on the last day of that year. It applies to plans adopted for taxable years beginning after 2019. Under section 404(a)(6), an employer contribution made by the return due date, including extensions, is treated as made on the last day of the year.

Elective deferrals are stricter. Under Treasury Regulation section 1.401(k)-1(a)(3)(iii), an election to defer can apply only to pay that is not yet available when the election is made, and only to pay that becomes available after the plan is adopted. A sole proprietor’s compensation is treated as available on the last day of the year under section 1.401(k)-1(a)(6)(iii), so in an ongoing plan the deferral election has to be made by December 31, although Publication 560 allows an owner’s deposit to follow by the return due date, including extensions.

SECURE 2.0 section 317 added a first-year exception to section 401(b)(2). When an individual who owns the entire interest in an unincorporated trade or business, and who is its only employee, adopts a 401(k) after year end, deferrals made before that individual’s return due date, determined without regard to extensions, are treated as made before the end of the plan’s first plan year. Publication 560 describes this as a rule for a sole proprietor, and its definitions count as a sole proprietor a single-member LLC that is treated as a disregarded entity for tax purposes. We read the statute the same way, since the regulations treat a disregarded LLC’s activities in the same manner as a sole proprietorship, although section 401(b)(2) itself does not mention LLCs. The exception does not reach an owner whose spouse is on the payroll, because the owner has to be the business’s only employee. For an owner it does cover, a solo 401(k) adopted in early 2027 can still take 2026 deferrals if they are paid to the plan before the time for filing the 2026 return, which is April 15, 2027 without extensions. An extension does not move that date, and the exception applies only to the plan’s first year.

The exception does not reach an S corporation, including an LLC that has elected to be taxed as one, because for tax purposes that business is a corporation rather than an unincorporated business, and its owner is in a different position in any case. The owner’s deferral is a reduction of a paycheck, so the election has to come before the pay it applies to. Once the corporation has paid its last 2026 payroll, none of the 2026 salary is still unpaid and available to defer. An S corporation owner who wants the 2026 deferral needs the plan adopted and the deferral elected before the paychecks it comes out of, which in practice means before the corporation’s final payroll of the year. If that date passes, the corporation can still adopt a 401(k) by its extended return due date and make the 25 percent employer contribution for 2026, or set up a SEP for the same amount, but the 2026 deferral is lost.

Employees change the answer

A SEP has to cover every employee who has reached age 21, has worked for the practice in at least 3 of the last 5 years, and was paid at least $800 in 2026, and the plan may use looser requirements but not stricter ones. Under section 408(k)(3)(C), contributions must bear a uniform relationship to compensation, and the IRS model Form 5305-SEP states the rule as the same percentage of compensation for every employee. An owner who contributes 25 percent of their own salary contributes 25 percent of each eligible employee’s pay as well. For a sole proprietor, the owner’s 20 percent is the self-employed version of the same 25 percent plan rate, so eligible employees receive the full 25 percent of their pay.

A solo 401(k) stays a one-participant plan only while there is no one else to cover. The IRS describes it as a traditional 401(k) covering a business owner with no employees, or that person and a spouse, and says that if you hire employees who meet the plan’s eligibility requirements, you must include them in the plan, and their deferrals become subject to nondiscrimination testing unless the plan is a safe harbor plan or another design exempt from testing. From then on it is an ordinary 401(k) with employees in it, and its cost and administration change with it. The three-year service rule can make a SEP look inexpensive when a clinician is first hired, but a practice that expects to keep its staff should price the plan for the year they become eligible, not just for this one. Whether an associate counts as an employee for these rules turns on the same classification question covered in our post on W-2 and 1099 clinicians.

Form 5500-EZ once the plan passes $250,000

A one-participant plan, whether the business is incorporated or not, has to file Form 5500-EZ for any year in which its assets, combined with those of any other one-participant plans the employer maintains, exceed $250,000 at the end of the plan year. It also files for the plan’s final year, whatever the balance. The return is due by the last day of the seventh month after the plan year ends, which is July 31 for a calendar-year plan, and moves to the next business day when that date falls on a weekend or legal holiday. A SEP adopted on Form 5305-SEP usually has no annual return at all, which is a real administrative difference once a solo 401(k) has grown past the threshold.

Roth contributions after SECURE 2.0

Both plans can now receive Roth money, if the documents allow it. Section 601 of SECURE 2.0 lets an employee designate a Roth IRA to receive SEP contributions for taxable years beginning after 2022. Under Notice 2024-2 the employer is not required to offer the option, and contributions go to a Roth SEP-IRA only if the employee has affirmatively elected it. A contribution to a Roth SEP-IRA is not excluded from income, and Notice 2024-2 puts the employer’s contribution in income for the year it is actually made to the Roth IRA, even when it counts as a contribution for the prior year, so a 2026 Roth SEP contribution made in March 2027 is 2027 income. Publication 560 has the employer’s nonelective contribution to a Roth SEP-IRA reported on Form 1099-R. The IRS model Form 5305-SEP, last revised in December 2004, still says contributions may not be made to a Roth IRA, and Notice 2024-2 addresses that directly. Asked how an employer can make SEP contributions to a Roth IRA before the IRS forms are amended, it answers that an employer using Form 5305-SEP or an IRS-approved prototype document may continue to use it without amendment until the IRS issues new forms. In practice, then, a Roth SEP contribution depends on the employer offering the election and on the IRA custodian accepting it.

Section 604 of SECURE 2.0 lets a 401(k) allow employer matching and nonelective contributions made after December 29, 2022 to be designated as Roth. Under Notice 2024-2, a Roth employer contribution must be fully vested, is included in the participant’s income for the year it is allocated to the account, and is not wages for income tax withholding or for Social Security and Medicare tax. A plan does not have to offer every type of Roth contribution, so whether a particular solo 401(k) accepts Roth deferrals, Roth employer contributions, or both comes down to the provider’s plan document.

Starting in 2026, catch-up contributions must be Roth for some participants. Section 414(v)(7) requires catch-up contributions to be designated Roth for a participant whose FICA wages from the employer sponsoring the plan for the preceding year exceeded a threshold, which Notice 2025-67 sets at $150,000 for 2025 wages, governing catch-ups made in 2026. Under Notice 2023-62 the IRS treated 2024 and 2025 as an administrative transition period. The final regulations, T.D. 10033, generally apply to contributions in taxable years beginning after December 31, 2026, and a reasonable, good faith interpretation of the statute applies before then. The regulations measure FICA wages by the Social Security wages reported in box 3 of the participant’s Form W-2.

Because the rule turns on wages, the business form matters. The preamble to the final regulations says that an individual with no FICA wages from the employer sponsoring the plan for the preceding year, giving as its example a partner who had only self-employment income, is not subject to the Roth catch-up requirement. A sole proprietor’s plan compensation is likewise self-employment income rather than FICA wages, so on that reasoning the requirement does not reach a sole proprietor’s catch-up contributions. An S corporation owner is in the opposite position. An owner whose 2025 Form W-2 from the corporation showed more than $150,000 of Social Security wages can make a 2026 catch-up only as a designated Roth contribution under section 414(v)(7)(A), so a plan with no Roth feature allows that owner no catch-up at all, a result the final regulations, applicable from 2027, state expressly. An owner in that position who wants the catch-up needs a plan that offers Roth deferrals.

The backdoor Roth and a SEP-IRA balance

An owner whose income is too high for a direct Roth IRA contribution can make a nondeductible traditional IRA contribution and convert it, the arrangement known informally as a backdoor Roth. The tax on the conversion is figured on Form 8606, and line 6 of that form asks for the total value of all traditional IRAs at December 31 of the year. The Form 8606 instructions define traditional IRAs to include traditional SEP-IRAs, and section 408(d)(2) treats all of a person’s IRAs other than Roth IRAs as one contract in figuring the taxable part of a distribution (section 408A(d)(4)(A) keeps Roth IRAs separate). A traditional SEP-IRA balance is pre-tax money, so it pulls a proportionate share of each conversion into income.

A 401(k) balance is not an IRA and is not part of that figure, and a Roth SEP-IRA counts as a Roth IRA under the same instructions, so neither one affects the calculation. Publication 590-A notes that the otherwise taxable part of a traditional IRA can be rolled into a qualified plan, and that qualified plans may, but are not required to, accept such rollovers. For an owner who uses the backdoor Roth, that favors a solo 401(k) that accepts rollovers over a growing traditional SEP-IRA.

Choosing between them

For an owner with no employees, a solo 401(k) allows more than a SEP at every level of pay below the point where a SEP reaches $72,000 by itself, because it adds the deferral to the same employer contribution. In both hypotheticals above the difference was the full $24,500. It is also the only one of the two with a catch-up contribution, and it keeps a backdoor Roth clean. A SEP is simpler to open, usually has no annual return, and can be started for 2026 as late as the extended due date of the return, which makes it the simpler answer when the decision comes after the year has closed. An S corporation owner who wants the larger figure has to act while there is still 2026 payroll to defer from, and a sole proprietor with no employees has until the April 15, 2027 filing deadline to adopt a new solo 401(k) and fund the deferral. Once there are employees, the comparison has to include what each plan costs for them.

Where we help

We work through this with practice owners as part of tax planning, ideally in the fall, while there is still time to adopt a plan and run deferrals through payroll. For S corporation owners the retirement contribution and the salary are settled together, which makes the question part of our S corporation work. The rest of the year-end list is in our post on year-end tax planning for practice owners. Our pages for therapy practices, psychologists, optometrists, dentists, and veterinarians cover what is different about each. If you are deciding between the two plans for 2026, book a consultation and we will run your numbers with you.

This post describes federal tax rules for 2026 as general information. Plan documents, provider options, and state tax treatment vary, and it is not advice for any particular practice.

• Retirement plans
• S corporation
• Tax planning