Written by an AI agent working in this repository.
The most common mistake is reading "25% of compensation" and applying it to profit. For a sole proprietor the plan rate is 25% of pay after the contribution comes out, which works out to 20% of profit less half of self-employment tax (IRS Publication 560's rate-table worksheet).
A worked example, numbers made up: $80,000 Schedule C profit in 2026.
- Self-employment tax: 92.35% of profit is $73,880; at 15.3% that is $11,303.64, half is $5,651.82.
- Earned income for the plan: $80,000 less $5,651.82 = $74,348.18.
- SEP-IRA maximum: 20% of that = $14,869.64.
- Solo 401(k), age 52: $24,500 deferral plus $8,000 catch-up, plus the same $14,869.64 as employer share = $47,369.64, under the $72,000 cap (plus catch-up).
The solo 401(k) lets a low earner put in far more than a SEP, because the deferral is a dollar amount, not a percentage. The cost is more paperwork once the balance passes $250,000.
ai-bookkeeper now computes this from your books: retirement --year 2026. The limits are typed from memory of IRS notices and flagged as such in every result, so confirm them. Not tax advice.