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WalletPrep worksheet · Work and income

How to save for retirement when you're self-employed

Name ____________________ Date __________

Key ideas

  1. Self-employed SEP math uses 20%, not 25%. The 25% plan rate becomes about 20% of net profit after you subtract half of your self-employment tax.
  2. A solo 401(k) has two parts. You defer up to $24,500 as the employee, then add the same 20% employer share a SEP allows.
  3. Everything together caps at $72,000. That is the 2026 limit on employee plus employer contributions across your plans, before age 50 catch-up.

Vocabulary

IRA
Individual retirement account: a tax-advantaged retirement account you open yourself at a bank or brokerage, separate from your job.
SEP IRA
A retirement account a business owner funds for themselves and any eligible employees, up to 25% of pay or a yearly dollar cap.
Solo 401(k)
A 401(k) for a business owner with no employees other than a spouse, where you contribute both as the employee and as the employer.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.
Roth IRA
An IRA funded with money you already paid tax on. Growth and qualified withdrawals in retirement are tax-free.
Self-employment tax
Social Security and Medicare tax for people who work for themselves. It is 15.3% on 92.35% of net profit, on top of income tax.

Work it out

Sam is a freelance developer under 50 with no employees and no other job. His Schedule C net profit is $80,000. His self-employment tax is $11,304, so half is $5,652.

  1. Net profit
  2. Half of SE tax
  3. Earnings for the plan
  4. Employer rate
  5. SEP or employer share
  6. Employee deferral
  7. Solo 401(k) total

Check yourself

  1. A freelancer's net profit is $50,000 and half of self-employment tax is $3,532. About how much can go into a SEP IRA?

    • A. $12,500
    • B. $9,294
    • C. $7,500
    • D. $5,000

  2. What does a solo 401(k) allow that a SEP IRA does not?

    • A. A tax deduction
    • B. Contributions after the year ends
    • C. An employee deferral on top of the employer share
    • D. No limit at all

  3. Who can use a solo 401(k)?

    • A. A business owner with no employees other than a spouse
    • B. Any business with up to 100 employees
    • C. Only corporations
    • D. Only people over 50

Your turn

Take last year's Schedule C net profit, subtract half of your self-employment tax and multiply by 20%. That is your SEP figure. Add the employee deferral to see your solo 401(k) room, then pick a plan.

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Answer key

How to save for retirement when you're self-employed

Work it out

  1. Net profit$80,000
  2. Half of SE tax− $5,652
  3. Earnings for the plan= $74,348
  4. Employer rate20%
  5. SEP or employer share$14,870
  6. Employee deferral$24,500
  7. Solo 401(k) total= $39,370
  1. Sam subtracts half his self-employment tax from his profit: $80,000 − $5,652 = $74,348.
  2. The employer share is 20% of that: $74,348 × 20% = $14,870. That is the most he can put in a SEP IRA.
  3. In a solo 401(k) he can add the 2026 employee deferral of $24,500: $14,870 + $24,500 = $39,370, well under the $72,000 cap.

Check yourself

  1. B. $9,294 $50,000 − $3,532 = $46,468, and $46,468 × 20% = $9,294 (rounded). Self-employed SEP math uses 20% after the self-employment tax deduction.
  2. C. An employee deferral on top of the employer share A solo 401(k) lets you contribute as the employee and as the employer. A SEP IRA only takes employer contributions.
  3. A. A business owner with no employees other than a spouse A one-participant 401(k) covers a business owner with no employees, or the owner and a spouse.