Nobody hands a freelancer a 401(k). You can open an ordinary IRA yourself, and its limit is low enough that one good year of self-employment income runs past it. Working for yourself opens three accounts with far more room: the SEP-IRA, the solo 401(k) and the SIMPLE IRA. They differ on who puts money in, how much, and when it is due, and the deadlines are the part people get wrong.
A SEP-IRA Is Funded by the Business, Not by You
A SEP-IRA (Simplified Employee Pension) takes employer money only. There is no salary deferral, so you cannot route part of a client payment into it the way an employee routes part of a paycheck into a 401(k). When you work for yourself, you are the employer, so the contribution comes from that side of you.
The cap is 25% of compensation, up to a dollar ceiling the IRS resets every year. For someone you pay on a W-2, compensation is their wages and the math is one multiplication.
Your own number is harder. Compensation means net earnings from self-employment, and two things come out before the rate applies: half of the self-employment tax that 1099 work makes you pay both halves of, and the SEP contribution itself. The contribution sits inside the figure it is measured against. That loop is why your real share of profit lands below 25%, and why IRS Publication 560 gives you a rate table instead of one clean percentage.
The Same-Percentage Rule Is the SEP's Trap
Whatever percentage you pick applies to everyone eligible, you included. Choose 20% for yourself and every eligible employee gets 20% of their pay from the business.
Say you take 20% and you also pay an assistant $40,000. That assistant is owed $8,000, out of the business, the same year.
Eligible has a definition: age 21 or older, worked for you in at least three of the last five years, and earned at least a small minimum the IRS sets annually. A plan can be more generous than that, never stricter. No contribution is required in a given year, so a lean year can be a zero year.
A Solo 401(k) Lets You Contribute Twice
A solo 401(k) covers a business owner with no employees, or that owner and a spouse. You contribute in two capacities. As the employee you make an elective deferral, capped by a dollar figure set each year. As the employer you add up to 25% of compensation, using the same reduced calculation a SEP uses.
Dollar limit versus percentage limit is the whole reason a modest income does better here. Picture two freelancers, each netting $50,000. Both can make the same employer contribution, a fraction of that $50,000. Only the one with a solo 401(k) puts a deferral on top, and that piece is limited by a dollar amount rather than by a share of income. An overall annual cap covers both contributions together, but at $50,000 of profit you are nowhere near it.
Hiring One Person Ends the Solo Version
The word solo is doing real work. The plan skips nondiscrimination testing, the annual check that a 401(k) is not tilted toward the owner, only because there is nobody to test against.
Hire a non-spouse employee who meets the plan's eligibility terms and that exemption is gone. It becomes an ordinary small-business 401(k), with testing, coverage rules, and the filing and administration that follow. Nothing is confiscated, but the cheap version is over.
Plans usually get amended before the new hire's eligibility date, since a plan that has already failed testing is fixed with refunds and paperwork. Part-time hires are the usual surprise, because eligibility comes from the plan document and the tax code, not the job title.
The SIMPLE IRA Is Built for a Business With Staff
A SIMPLE IRA works for an employer with 100 or fewer employees. Employees defer from their own pay, as in a 401(k), and the employer contribution is required rather than optional. That requirement is the trade for the light paperwork.
You choose one of two formulas each year:
Match what an employee defers, dollar for dollar, up to 3% of their pay.
Contribute 2% of pay for every eligible employee, including the ones who defer nothing.
An employee qualifies after earning at least $5,000 in any two earlier years, with $5,000 expected this year, and a plan can set an easier bar. One rule belongs to this account alone: money taken out in the first two years of participation faces a 25% early withdrawal penalty instead of the usual 10%.
For a freelancer with no staff, a SIMPLE generally allows less than the other two, so it shows up once there is a payroll.
Every Deadline Here Is a Different Date
SEP-IRAs sit at the forgiving end. You can set one up and fund it as late as the due date of your business tax return for that year, extensions included, so a plan that did not exist in December can still cover December.
Solo 401(k)s split in two. The plan can be adopted, and the employer contribution made, by that same filing deadline with extensions. The employee deferral runs on a different clock, because a self-employed person's pay counts as available on the last day of the tax year. The election to defer has to be in place before the tax year ends, on December 31 for almost everyone, though the cash itself can arrive later. That deadline is what usually rules a solo 401(k) in or out for someone deciding late in the year.
SIMPLE IRAs are the strict end. A new one has to take effect between January 1 and October 1 of the year it covers, unless the business itself started later. Miss October 1 and the year is gone. Deferrals withheld from pay go in within 30 days after the end of the month they came from, and the employer's match or 2% arrives by the return due date with extensions.
The Roth Option, and What a SEP Does to a Backdoor Roth
For tax years after 2022, a SEP or a SIMPLE can accept Roth contributions when the plan offers that choice. That option is new, and not every provider supports it. Solo 401(k)s have allowed Roth deferrals far longer. Roth money counts as income in the year you contribute it, so a Roth SEP contribution costs the business deduction you would otherwise take. It is the same now-or-later trade that decides Roth versus traditional anywhere else.
One more interaction matters if you use the backdoor Roth, where you make a non-deductible traditional IRA contribution and convert it. You cannot convert only the after-tax dollars. Form 8606 totals the December 31 value of every traditional IRA you own, and SEP-IRAs and SIMPLE IRAs count in that total. With $63,000 sitting in a SEP and a $7,000 non-deductible contribution, after-tax dollars are 10% of the pile, so 90% of anything you convert is taxable income.
A solo 401(k) is not an IRA and never enters that calculation. That is why freelancers with large SEP balances and a backdoor Roth habit look at moving the money into a solo 401(k) plan first.
