Same Profit, Double the Contribution: Year-End Tax Planning for Business Owners

An owner clearing $120,000 in self-employment profit can put about $22,300 into a SEP IRA for 2026. Same profit, same business, about $46,800 into a solo 401(k). The only thing that changed is the plan document.

That gap is the most expensive decision in year-end tax planning for business owners, and most people settle it by asking their bank which account is faster to open.

It deserves better, because the choice does two jobs at once. It sets how much you can shelter this year, and it quietly decides whether one of the best long-term moves available to a high earner still works for you in ten years.

Why the two plans are not the same size

A SEP IRA is funded by the employer only. The IRS states it plainly: elective salary deferrals and catch-up contributions are not permitted in SEP plans. Your contribution is capped at the lesser of 25% of compensation or $72,000 for 2026, and for a self-employed person that 25% works out to roughly 20% of net earnings after the deduction for half of self-employment tax.

A solo 401(k) lets you wear both hats. You contribute as the employee, up to $24,500 for 2026, plus another $8,000 if you are 50 or older. Then you contribute again as the employer, using that same roughly 20% calculation. Both pieces together are capped at the same $72,000 for 2026.

The employee deferral is the whole story. It is a flat dollar amount rather than a percentage, so it does not shrink when your profit does. On a modest year the solo 401(k) can hold close to twice what a SEP holds. At very high profit the two converge, because both eventually run into the same $72,000 ceiling.

What does the math actually look like?

Here is an illustrative example with rounded figures. It is not a client result.

A consultant nets $120,000 of profit for 2026 and has no employees.

Half of her self-employment tax comes to roughly $8,500, which leaves about $111,500 of earned income for plan purposes. Twenty percent of that is about $22,300. That is her SEP ceiling, and it is also the employer piece of a solo 401(k).

The solo 401(k) adds the $24,500 employee deferral on top of it. Total: about $46,800.

Nothing about the business changed. She sheltered roughly $24,500 more because one plan design allows deferrals and the other does not.

Where year-end tax planning for business owners usually goes wrong

Here is the part almost nobody weighs while opening the account, and it is why this is a planning decision instead of an administrative one.

A SEP IRA is an IRA.

That sounds obvious. It has a consequence. When you convert money to a Roth, Form 8606 asks for the total December 31 value of all your traditional IRAs, and the instructions specifically fold SEP IRAs and SIMPLE IRAs into that total. Balances held in a 401(k) are not included.

So if you ever want to make backdoor Roth contributions, which is the standard route once your income passes the limits on contributing to a Roth directly, a SEP balance sits inside that calculation permanently and makes a slice of every future conversion taxable. A solo 401(k) balance stays outside it. Identical dollars, identical investments, completely different treatment.

For an owner whose income is climbing, that is not a footnote. It is the difference between having a working Roth strategy at 50 and not having one.

When the SEP is still the right answer

We recommend SEPs regularly, and the reasons are practical.

A SEP can be set up and funded as late as the due date of your return including extensions. That makes it the only real option for an owner who arrives in March wanting a deduction for a year that already closed. A solo 401(k) has to exist before you can defer into it, so if the employee deferral is the reason you want one, open the plan before December 31 rather than betting on a fix afterward.

A SEP is also lighter to carry. A solo 401(k) holding $250,000 or more in assets at year end files Form 5500-EZ every year. And the moment you hire someone who meets the plan's eligibility rules, the solo 401(k) is no longer solo, which pulls you into nondiscrimination testing and a real plan document.

Then there is what neither plan does, and this is where owners are most often surprised. A self-employed person's retirement plan deduction is taken on Schedule 1, not on Schedule C. Self-employment tax gets computed on business profit before that deduction ever appears. A $46,800 contribution lowers your income tax and leaves your self-employment tax untouched. It also does not repair a quarterly estimated payment you skipped, and the next one is due September 15, 2026.

Run the number this month

Pull your year-to-date profit, subtract half of your estimated self-employment tax, multiply by 20%. That is your SEP ceiling. Add $24,500 to it and ask whether the difference is worth anything to you. Year-end tax planning for business owners works far better in August than in December, because in August the plan can still be opened, funded across four months of cash flow, and coordinated with whatever else you have coming.

We're currently offering our Tax Savings Blueprint, a forward-looking planning service for the 2026 tax year. We review your returns and current-year documents, project where your 2026 return is heading, and walk you through it on a call, so you leave with a clear picture of your tax situation, the strategies available to you, and a set of actions to put in motion. Schedule a free intro call to learn more.

This is for general educational purposes and isn't personalized tax advice. Every situation is different, talk with your CPA before acting on any strategy discussed here.