Quick answer: both plans let you save part of your side hustle profit for retirement with a tax deduction. A SEP IRA is simpler: only “employer” contributions, generally up to about 20% of net self-employment earnings for a sole proprietor, capped at $72,000 for 2026. A solo 401(k) adds an “employee” deferral of up to $24,500 for 2026 (plus catch-up contributions if you are 50 or older), which often lets lower-profit side hustles save more. The catch: if you already defer into a 401(k) at your day job, that $24,500 limit is shared between both plans, which can make a SEP IRA or the employer-only part of a solo 401(k) the better fit.
Side hustle profit can do more than cover bills. Under IRS rules, self-employment income lets you open your own retirement plan, even if you also have a 401(k) at work. Contributions are generally deductible, which also reduces the income tax on that hustle.
The two most common choices for one-person businesses are the SEP IRA and the solo 401(k), sometimes called a one-participant 401(k). This guide compares them using IRS figures for 2026 and walks through the situations where each one wins. For help choosing and launching a hustle in the first place, see our guide to side hustle ideas.
Sources: Internal Revenue Service, Simplified Employee Pension Plan (SEP) page, One-Participant 401(k) Plans page, Publication 560 (Retirement Plans for Small Business), Notice 2025-67 and IRS news release on 2026 retirement plan limits, Retirement Plans for Self-Employed People page, Form 5500-EZ instructions, SECURE 2.0 Act provisions as summarized by the IRS. General information, not tax or investment advice. Checked October 2026.
Who Can Open These Plans
Both plans require self-employment income, which includes profit from a sole proprietorship, single-member LLC, partnership or freelance work reported on Schedule C. A hobby does not qualify, because hobby income is not earned income from a trade or business.
The solo 401(k) is designed for a business owner with no employees other than a spouse. A SEP IRA can cover employees too, but if you hire eligible workers you generally must contribute the same percentage for them. Most side hustlers have no employees, so either plan works.
2026 Contribution Limits at a Glance
| 2026 limit | SEP IRA | Solo 401(k) |
|---|---|---|
| Employee elective deferral | Not available | $24,500 |
| Catch-up, age 50+ | Not available | $8,000 |
| Higher catch-up, ages 60-63 | Not available | $11,250 (instead of $8,000) |
| Employer contribution | Up to 25% of compensation (about 20% of net SE earnings for sole proprietors) | Same employer formula |
| Total annual additions cap | $72,000 | $72,000, plus catch-up |
| Compensation considered | Up to $360,000 | Up to $360,000 |
The IRS announced these 2026 figures in November 2025. The traditional and Roth IRA limit for 2026 is $7,500, which is separate and can be used alongside either plan.
How the Employer Contribution Works for Self-Employed People
Sole proprietors are often misled by the “25% of compensation” headline. For self-employed people, compensation means net earnings from self-employment after subtracting half of your self-employment tax and the plan contribution itself. Publication 560 provides a worksheet, and the result works out to roughly 20% of net profit after the half-SE-tax deduction.
As a hypothetical example, a side hustle with $30,000 of net profit would have about $2,119 of deductible self-employment tax (half of 15.3% on 92.35% of profit). The remaining $27,881 multiplied by 20% allows an employer contribution of about $5,576. Use the Publication 560 worksheet or tax software for your exact number.
The Big Difference: Employee Deferrals
A solo 401(k) lets you contribute in two roles. As the “employer,” you get the same roughly 20% contribution as a SEP. As the “employee,” you can also defer up to $24,500 of your self-employment earnings for 2026, up to 100% of compensation.
That second role is why a solo 401(k) often allows more savings at lower income. Using the same $30,000 example, a SEP IRA tops out near $5,576. A solo 401(k) could allow the same employer piece plus a large deferral, limited by the fact that total contributions cannot exceed your net self-employment earnings.
The Day-Job 401(k) Catch
Here is the rule many side hustlers miss. The elective deferral limit applies per person, not per plan. The IRS explains that if you participate in more than one 401(k), 403(b) or similar plan, your total deferrals across all of them cannot exceed the annual limit.
So if you already defer $24,500 at your day job in 2026, you have no deferral room left for a solo 401(k). You could still make the employer contribution, but that is the same amount a SEP IRA allows. In that case, the simplicity of a SEP often wins.
The overall $72,000 annual additions cap, by contrast, generally applies per unrelated employer. Your side business’s plan has its own cap separate from your day job’s plan, though both remain subject to the shared deferral limit.
Three Hypothetical Scenarios
These simplified examples show how the choice shifts. They ignore catch-up contributions and use the rough 20% employer formula.
- Profit of $12,000, no day-job 401(k). A SEP IRA allows a little over $2,200. A solo 401(k) could allow far more, because the employee deferral can cover most of the remaining net earnings. Solo 401(k) usually wins.
- Profit of $40,000, day-job deferrals already at $24,500. No deferral room is left, so both plans allow roughly the same employer contribution of about $7,400. A SEP IRA usually wins on simplicity.
- Profit of $40,000, day-job deferrals of $10,000. About $14,500 of deferral room remains for a solo 401(k), on top of the employer piece. Solo 401(k) usually wins if you want to save that much.
Run your own numbers with the Publication 560 worksheet before contributing.
Roth Options
SECURE 2.0 expanded Roth choices for small plans. Many solo 401(k) providers allow Roth elective deferrals, which are not deductible now but can be withdrawn tax-free in retirement if rules are met. The law also allows Roth SEP contributions and Roth employer contributions, though not every provider offers them yet. Ask your provider which options are available.
Deadlines
- SEP IRA. You can generally set up the plan and make contributions as late as your tax return due date, including extensions, for the prior year.
- Solo 401(k). SECURE Act changes allow a plan to be established after year-end, up to the business’s tax filing deadline, for employer contributions. Under SECURE 2.0, a sole proprietor’s first-year plan may also accept elective deferrals up to the return due date without extensions. Rules for later years are stricter, with deferral elections generally made during the year. Check with your plan provider before relying on a late setup.
Paperwork and Costs
A SEP IRA is set up with a short form, often IRS Form 5305-SEP, kept with your records, plus an account at a brokerage. There is no annual IRS filing for the plan.
A solo 401(k) requires a plan document, usually provided by the brokerage. Once plan assets exceed $250,000 at the end of a year, you must file Form 5500-EZ, according to the IRS. Many brokerages offer solo 401(k) plans with no setup fees, though some charge for features like loans or Roth contributions.
Which Plan Fits Your Side Hustle?
A SEP IRA tends to fit when:
- You already max out deferrals at your day job.
- Your side hustle profit is high enough that 20% covers what you want to save.
- You want the least paperwork.
- You might hire employees later and want a simple structure.
A solo 401(k) tends to fit when:
- You have little or no 401(k) deferral at a day job, or no day job.
- Your profit is modest and you want to save more than 20% of it.
- You want Roth deferrals or catch-up contributions.
- You may want a plan loan feature, if the provider offers one.
How Contributions Fit With Taxes
Deductible contributions reduce income tax but not self-employment tax, since SE tax is calculated on profit before the retirement deduction. You claim the deduction on Schedule 1, not Schedule C.
Because the contribution depends on your final profit, it helps to know your numbers throughout the year. Our guide to tracking side hustle income and expenses and our beginner’s guide to side hustle taxes show how profit is calculated. Many people keep hustle money in a separate bank account, which also makes it easier to set aside retirement contributions.
Step-by-Step: Opening a Plan
- Confirm your side hustle is a business with net self-employment earnings, not a hobby.
- Check how much you already defer at your day job this year, if you have one.
- Estimate this year’s net profit using your records, and subtract half of self-employment tax.
- Pick a plan type using the guidance above.
- Choose a provider. Many large brokerages offer both SEP IRAs and solo 401(k) plans, and you will usually need your Social Security number or an EIN for the business.
- Complete the plan paperwork, such as Form 5305-SEP for a SEP IRA or the provider’s plan adoption agreement for a solo 401(k).
- Make contributions and keep records of the amount, date and whether each was an employee deferral or employer contribution.
- Claim the deduction on Schedule 1 when you file, and track plan assets so you know when Form 5500-EZ applies.
Withdrawal and Access Rules
Money in either plan is meant for retirement. Under IRS rules, withdrawals before age 59 1/2 are generally taxable and may face an additional 10% tax unless an exception applies. Pre-tax money is taxed as ordinary income when withdrawn.
Required minimum distributions generally start at age 73 under SECURE 2.0, rising to 75 for people who turn 74 after 2032. Roth balances in a 401(k) are no longer subject to lifetime required minimum distributions starting in 2024, according to the IRS.
Some solo 401(k) plans permit loans, typically up to the lesser of $50,000 or half of your vested balance. SEP IRAs do not allow loans. Loans are a provider-level feature, so confirm before you choose.
What Happens If the Hustle Ends
If your side business stops, you can stop contributing at any time. SEP contributions are discretionary each year, so a slow year simply means a smaller or zero contribution. A solo 401(k) plan should be formally terminated if the business closes, and the balance can usually be rolled into an IRA. Your provider can walk you through the steps.
Common Mistakes
- Exceeding the shared deferral limit across a day-job 401(k) and a solo 401(k).
- Using gross receipts instead of net earnings to calculate the employer contribution.
- Forgetting Form 5500-EZ once assets pass $250,000.
- Opening a solo 401(k) after hiring employees, which makes it no longer a one-participant plan.
- Contributing based on hobby income, which does not qualify.
Frequently Asked Questions
Frequently Asked Questions
Can I have a solo 401(k) if I have a 401(k) at work? Yes. However, your employee deferrals across both plans share one annual limit, $24,500 for 2026 for people under 50.
How much can I put in a SEP IRA from side hustle income? For a sole proprietor, roughly 20% of net self-employment earnings after the half-SE-tax deduction, up to $72,000 for 2026.
Is a SEP IRA or solo 401(k) better for a small side hustle? A solo 401(k) usually allows more for modest profits if you have unused deferral room. If your day-job deferrals already use the limit, a SEP IRA is often simpler with the same result.
Do retirement contributions lower self-employment tax? No. They lower income tax. Self-employment tax is figured on your net profit before the retirement deduction.
Can I also contribute to an IRA? Yes. Traditional or Roth IRA contributions, up to $7,500 for 2026, are separate from SEP and solo 401(k) limits, though deductibility and Roth eligibility depend on income and workplace plan coverage.
When is the deadline to contribute? SEP IRA contributions can generally be made until your tax return due date, including extensions. Solo 401(k) deadlines depend on the type of contribution and when the plan was set up.
The Bottom Line
Both plans turn side hustle profit into tax-advantaged retirement savings. Check your day-job deferrals first: if you have unused room, a solo 401(k) usually lets you save more. If you are already at the limit or want the simplest option, a SEP IRA does the job with minimal paperwork. IRS Publication 560 and a tax professional can confirm the exact contribution for your profit.