2026 limits

  • Employee deferral (solo 401(k) only): up to $24,500.
  • Catch-up (solo 401(k) only): $8,000 more at 50 or older, or $11,250 if you are 60–63 in 2026, on top of everything else.
  • Employer contribution (both plans): up to 25% of compensation — for a sole proprietor that works out to 20% of net profit after the deductible half of self-employment tax.
  • Total cap: $72,000 a year, catch-up excluded. Compensation counts only up to $360,000.

The figures come from IRS Notice 2025-67 and the IRS’s 2026 limits announcement. The SEP IRA gives you the employer contribution only: no deferral, no catch-up. That is why a solo 401(k) lets you put away more at almost every income below the cap.

Why it’s 20%, not 25%, for sole proprietors

Plans express the employer contribution as 25% of compensation. For a sole proprietor, compensation is net profit minus the deductible half of self-employment tax minus the contribution itself — the contribution reduces the number it is measured against. Solving 25% × (earnings − contribution) gives a contribution of 20% of earnings. S corp owners skip this: the 25% applies to W-2 wages directly, which is why their profit distributions don’t raise the limit.

One more limit matters at modest incomes. Your deferral plus the employer contribution can’t exceed your compensation, and the employer contribution itself comes out of that compensation, so the employer share can be no more than half of what’s left of your net earnings after the deferral. IRS Pub 560’s worksheet for the self-employed applies this at step 12, and so does the calculator. Below roughly $24,500 of net earnings, the whole amount can go in as a deferral and there is no room for an employer share at all.

A worked example

A sole proprietor under 50 with $100,000 of net profit: self-employment tax is $14,129.55, half of it, $7,064.78, is deductible, leaving $92,935 of earned income. The employer contribution is 20% of that, $18,587. A SEP IRA stops there. A solo 401(k) adds the $24,500 deferral, for $43,087. A sole proprietor reaches the $72,000 solo 401(k) cap at about $237,500 of earned income, and a SEP needs about $360,000 to get there, which is the comparison our solo 401(k) vs. SEP IRA guide walks through.

What this doesn’t cover

The $24,500 deferral limit is per person across every 401(k) and 403(b) you contribute to, so a day job’s 401(k) uses it up. A solo 401(k) is only for businesses with no employees other than you and your spouse; a SEP has to cover eligible employees at the same percentage. Whether contributions go in pre-tax or as Roth, and the rules that can require higher earners’ catch-up contributions to be Roth, depend on your plan provider. Contributions also lower your income tax; the self-employment tax calculator shows what you owe before them.