For a sole proprietor the SEP IRA and the Solo 401(k) end up close: both are a percentage of net profit and the 401(k) adds an employee deferral on top. For an S-Corp owner they are not close at all, because every limit is computed from W-2 salary, the same salary you set as low as you could defend for payroll tax reasons. The plan choice and the compensation choice are one decision, and most owners make them separately.
This guide compares the SEP IRA and the Solo 401(k) for an S-Corp owner: how each limit is computed from salary, what the numbers look like at three salary levels, the employee rule that changes everything, the Roth and mega-backdoor options only the 401(k) has, and the cost and paperwork of each.
In a sole proprietorship, retirement contributions are a percentage of net self-employment earnings. In an S-Corp, the company's contribution to either plan is a percentage of the owner's W-2 wages, and distributions do not count. An owner who pays herself $60,000 in salary and takes $140,000 in distributions has $60,000 of plan compensation, not $200,000. The payroll tax saving from a low salary and the retirement capacity from a high one pull in opposite directions, and the right salary is the one that balances them for your situation, which is a number to model, not to guess.
The S-Corp contributes up to 25% of the owner's W-2 compensation, capped at the annual additions limit ($72,000 for 2026), to the owner's SEP IRA. There is no employee deferral, no Roth option, no catch-up for owners over 50, and no loans. Contributions are made by the company, deductible to the company, and can be made up to the company's tax filing deadline including extensions. Setup is a one-page form and a brokerage account; there are no annual filings.
The Solo 401(k) has two parts. The owner defers salary as an employee, up to the elective deferral limit ($24,500 for 2026, plus a catch-up of $8,000 at age 50 and above, and a higher catch-up at ages 60 to 63). The company then contributes up to 25% of W-2 compensation as the employer. Total contributions are capped at the annual additions limit ($72,000 for 2026, plus catch-ups). The deferral must be elected before the pay it comes from is paid, and it runs through payroll; the employer contribution can be made up to the filing deadline. Once the plan holds more than $250,000 it files a short annual return (Form 5500-EZ).
| W-2 salary | SEP IRA (25%) | Solo 401(k): deferral + 25% | Solo 401(k) at 50+ (with catch-up) |
|---|---|---|---|
| $60,000 | $15,000 | $24,500 + $15,000 = $39,500 | $47,500 |
| $110,000 | $27,500 | $24,500 + $27,500 = $52,000 | $60,000 |
| $200,000 | $50,000 | $24,500 + $50,000 = $72,000 (cap reached at $74,500) | $80,000 |
Two things stand out. At a modest salary the Solo 401(k) shelters more than twice what the SEP does, because the deferral does not depend on the salary percentage. And the SEP only catches up with the 401(k) around $290,000 of salary, where both hit the cap, which is a salary few S-Corp owners choose to pay themselves. For almost every S-Corp owner with no employees, the Solo 401(k) wins on capacity; the SEP wins on simplicity only.
Both plans require covering eligible employees, and the controlled group rules aggregate every business you control, so an employee in your other LLC counts. A SEP must contribute the same percentage for every eligible employee as for the owner, which at 25% is expensive. A 401(k) can be designed with matching or safe harbor formulas that cost less per employee, and a plan with employees stops being "solo" and needs a plan document, testing and a full Form 5500. Owners with several entities should check the controlled group before assuming they qualify for a Solo 401(k): the fleet LLC with one W-2 driver disqualifies the consulting S-Corp's solo plan.
Only the 401(k) offers a Roth deferral option, the ability to take a plan loan, and, if the plan document allows after-tax contributions and in-plan conversions, the mega-backdoor Roth, which lets an owner fill the annual additions limit with after-tax money converted to Roth on top of the deferral. For high-income owners who are past the regular Roth income limits, the mega-backdoor is the largest Roth contribution available anywhere; our guide to the backdoor Roth covers the IRA version. A SEP has none of these.
| SEP IRA | Solo 401(k) | |
|---|---|---|
| Setup | Form 5305-SEP, brokerage account, minutes | Plan document (free at most brokerages, or a paid document for mega-backdoor features), account, an EIN for the plan |
| Adoption deadline | Company's filing deadline including extensions | Plan must exist by year end for the deferral; employer contribution deadline follows the return |
| Deferral election | Not applicable | Before the pay it comes from; runs through payroll |
| Annual filing | None | Form 5500-EZ once plan assets exceed $250,000 |
| Cost | Usually none | Usually none at brokerages; $300 to $1,500 a year for a custom document with after-tax features |
The one operational requirement that catches owners is the deferral: it has to come out of payroll during the year, which means the payroll has to exist, the salary has to be large enough to absorb it, and the books have to record the deferral as a reduction of taxable wages. HaraPro keeps the S-Corp's payroll, the plan contributions and the owner's personal picture together, so the salary, the payroll tax and the retirement capacity are visible as one decision; the tax page shows the forecast, and one business is free forever.
For almost every S-Corp owner with no employees, the Solo 401(k): its employee deferral does not depend on salary, so it shelters far more at the modest salaries S-Corp owners typically pay themselves. The SEP wins only on simplicity.
No. Contributions are computed from W-2 wages only. Distributions do not create retirement capacity.
The employee deferral ($24,500 for 2026, plus catch-up at 50 and above) plus an employer contribution of up to 25% of W-2 salary, capped in total at the annual additions limit ($72,000 for 2026, plus catch-ups).
Usually not. Controlled group rules aggregate businesses under common control, so an employee in another company you control must be covered, and the plan is no longer solo.
The plan must be adopted by year end to make employee deferrals for that year, and deferrals have to come out of payroll during the year. Employer contributions can be made up to the filing deadline including extensions.