| Account | Who contributes | Roughly how much (2026) | Best for |
|---|---|---|---|
| SEP IRA | Employer only (you, as the business) | Up to 25% of compensation, capped around $72,000 | Solo earners or those with few employees who want the simplest high-limit option |
| SIMPLE IRA | Employee deferral + a required small employer contribution | Employee deferral in the high-teens-thousands, plus a ~2-3% employer add | Small businesses with a handful of employees wanting low admin cost |
| Solo 401(k) | You contribute as BOTH employee and employer | Employee deferral up to $24,500 PLUS employer profit-sharing, combined capped around $72,000 | Solo earners (no employees except a spouse) who want the highest possible limit |
The Solo 401(k) usually wins for a one-person business because you wear two hats. You contribute as the 'employee' (a salary deferral up to the standard $24,500 limit in 2026) AND as the 'employer' (a profit-sharing contribution of up to 25% of your compensation). Stacking both lets a solo earner reach the overall cap (around $72,000 in 2026) at a much lower income than a SEP IRA, which only uses the employer 25% lever. If you already max a 401(k) at a day job, your $24,500 employee deferral is shared across both plans — but the employer profit-sharing side of the Solo 401(k) is still available on your self-employment income.
| Decision factor | Points you toward... |
|---|---|
| I'm a true solo (no employees but maybe a spouse) | Solo 401(k) — highest limit at a given income; allows a Roth sub-account too |
| I want the absolute least paperwork and no annual filing | SEP IRA — fund it, deduct it, done; no Form 5500 until balances are large |
| I have a few W-2 employees | SIMPLE IRA — low cost, but you must contribute for eligible employees too |
| My income is modest and I want to save a high PERCENTAGE of it | Solo 401(k) — the employee deferral isn't capped at a percent of pay, so a low earner can still sock away a lot |
On top of choosing a retirement plan, most self-employed people get a separate, automatic tax break called the Qualified Business Income (QBI) deduction, created by Section 199A of the tax code. In plain terms: you can deduct up to 20% of your net business profit from your taxable income before the regular income tax is applied. If your sole proprietorship nets $80,000, the QBI deduction can knock roughly $16,000 off the income you're taxed on — a real, no-strings reduction.
The catches to know:
- It applies to 'pass-through' income — sole proprietors, single-member LLCs, partnerships, and S-corps — not to wages from a regular job.
- Above an income threshold (directionally around $200,000 for single filers and $400,000 for married-filing-jointly at 2026 levels), the deduction starts to phase out or get limited, and certain 'specified service' businesses (consulting, law, health, finance) face tighter limits once you're over the line. Below the threshold, almost everyone gets the full 20%.
- It's a deduction against income, not a credit, and it does NOT reduce your self-employment (Social Security + Medicare) tax — only your income tax.
The interaction with retirement plans matters: contributions to a SEP/SIMPLE/Solo 401(k) lower your net business income, which slightly lowers the QBI deduction base — but the retirement deduction is usually the bigger win, and you still come out far ahead doing both. The figures here are directional; the exact thresholds move every year, so verify against irs.gov before filing.
Solo 401(k) max ≈ Employee Deferral ($24,500) + 25% × Compensation, capped near $72,000
Sit with the ideas.
A single-member-LLC consultant nets $100,000 in profit. She contributes to a Solo 401(k) and also claims the QBI deduction. Which statement correctly describes how these two tax breaks work together?