Solo 401(k) or SEP IRA for a Client Netting $150k: Deferral Math a Preparer Can Show in Five Minutes

The question and the five-minute answer

A consultant, contract physician, or senior engineer nets $150,000 on Schedule C and asks: SEP or Solo 401(k)? The answer for anyone under about $360,000 of net profit is the Solo 401(k), and the reason fits on an index card. This article gives you the index card, the arithmetic behind it, and the exceptions. The Gigaverse CPA program gives the client a place to track the result.

The index card

• •SEP IRA: employer contribution only. About 20 percent of adjusted net earnings. At $150,000 net, about $27,900.
• •Solo 401(k): the same employer contribution plus a $24,500 employee deferral. At $150,000 net, about $52,400.
• •Ceiling for both: $72,000 in 2026, or $80,000 at 50 and older for the Solo 401(k) only.
• •Difference at $150,000: roughly $24,500 more shelter per year with the Solo 401(k), which at a 24 percent marginal rate is about $5,900 in federal tax.

The arithmetic

Self-employment tax first. Net earnings subject to SE tax are $150,000 times 0.9235, or $138,525. The Social Security portion (12.4 percent) applies up to the 2026 wage base and the Medicare portion (2.9 percent) applies to all of it. SE tax is roughly $21,200, and the deductible half is about $10,600.

Adjusted earnings for the employer contribution: $150,000 minus $10,600 equals about $139,400.

Employer contribution at the Schedule C effective rate: 20 percent of $139,400 is about $27,900. The 20 percent is the 25 percent statutory rate applied after the contribution reduces the base; 25 divided by 125 equals 20.

Employee deferral: $24,500 for 2026, or more with the age-50 catch-up.

Solo 401(k) total: about $52,400. SEP total: about $27,900. Both are under the $72,000 ceiling, so the ceiling is not the constraint at this income.

Where the SEP catches up

The SEP and Solo 401(k) employer contributions are identical. The Solo 401(k)'s advantage is entirely the employee deferral. That advantage disappears only when the employer contribution alone hits the $72,000 ceiling, which requires adjusted earnings of $360,000 and net profit slightly above that. Below that point the Solo 401(k) allows more; above it they tie for a client under 50. For a client 50 or older, the Solo 401(k) wins at every income because the SEP has no catch-up.

The compensation cap also matters at the top: only the first $360,000 of compensation counts for 2026, so the employer piece can never exceed 20 percent of that even for a client netting $500,000.

When the SEP is still the right call

• •The client missed the December 31 election. A Solo 401(k) employee deferral must be elected in writing by December 31 of the plan year. If it is March and the client has no plan, the deferral is gone for the prior year. A SEP can be opened and funded for the prior year up to the extended due date. For the prior year, recommend the SEP; for the current year, set up the Solo 401(k) now.
• •The client has W-2 employees. A Solo 401(k) requires no common-law employees other than the owner and spouse. A SEP can cover employees, though every eligible employee must receive the same percentage. Contractors do not count either way.
• •The client already defers $24,500 at a W-2 job. The employee deferral limit is per person across all 401(k)s. A client who maxes the deferral at a day job gains nothing from the Solo 401(k) deferral and can use a SEP for the employer piece with less paperwork.
• •The client wants zero administration. A Solo 401(k) requires a plan document and, once assets exceed $250,000, an annual Form 5500-EZ. A SEP requires neither.

When the Solo 401(k) is the only answer

• •Roth treatment at high income. The Solo 401(k) deferral can be Roth with no income limit. The client at $150,000 is near or past the Roth IRA phase-out, so the Roth 401(k) deferral is the way in.
• •Age 50 and older. The catch-up raises the total to $80,000 and has no SEP equivalent.
• •Loans. A Solo 401(k) can permit participant loans up to the lesser of $50,000 or half the balance. A SEP cannot.
• •Mega-backdoor strategies. After-tax contributions and in-plan Roth conversions are available in a Solo 401(k) with the right document; not in a SEP.

The deadlines to write on the return

• •Solo 401(k) adoption for the employer contribution only: by the extended due date of the return.
• •Solo 401(k) employee deferral election: in writing by December 31 of the plan year.
• •Solo 401(k) deposit of both pieces: by the return due date including extensions.
• •SEP adoption and funding: by the return due date including extensions.
• •Form 5500-EZ: July 31 following any year the Solo 401(k) exceeds $250,000 in assets.

Two adjacent items for the same client

A client at this income is above the Saver's Match phase-outs, but their spouse with part-time gig income may not be. Starting January 1, 2027, the match pays up to $1,000 into a non-Roth IRA for qualifying contributions, including Roth contributions, for filers under the MAGI limits ($20,500 to $35,500 single, $30,750 to $53,250 head of household, $41,000 to $71,000 joint). Gigaverse's Saver's Match Roth rule page explains the mechanics.

If mileage is on the return, confirm the 2026 split: $0.725 per mile for January through June and $0.76 for July through December. Mileage reduces net profit and therefore the employer contribution base.

Compensation and disclosure

If you point the client to a specific app afterward and receive anything for it, AICPA ET §1.520 applies: no commissions or referral fees for attest clients during the engagement period, and written disclosure before or at the time of the recommendation for everyone else, subject to your state board's rules. Gigaverse pays CPAs only a share of revenue on paid app subscriptions or a flat per-seat licence, never per account opened, per deposit, or on assets, because payments tied to accounts or deposits resemble transaction-based compensation under Exchange Act Section 15(a) and FINRA Rule 2040, and an SEC-registered adviser cannot share advisory fees with unregistered parties. The disclosure language and the reasoning are on the how we make money page.

The client can reproduce the five-minute math with the free Gigaverse tools, which is a good way to confirm you agree on the inputs before filing.

Where Gigaverse fits

Gigaverse is a subscription retirement app for people with 1099 income. Today it offers a Roth IRA through a FINRA/SIPC-member broker-dealer; and applications for a Solo 401(k) and a SEP IRA are open at gigaverse.ai/solo-401k and gigaverse.ai/sep-ira, reviewed by a person rather than opened instantly in the app. It also computes the limits, tracks contributions and the December 31 election deadline, and returns a clean summary to the preparer. It is pursuing SEC RIA registration and does not guarantee returns. CPA partners are paid only a share of subscription revenue or a flat per-seat licence and receive a §1.520-ready disclosure. Details are on the CPA partner page.