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.