SEP-IRA: simplicity
Easiest to set up and operate. Employer contributions only (no employee deferrals). Up to 20% of net SE earnings (effective rate). No annual filings (no Form 5500). Funded as late as the extended return due date. Major drawback: if you have employees, you must contribute the same percentage to each eligible employee's SEP — making it expensive at scale.
Solo 401(k): maximum contribution
Best for high contribution capacity at lower income. Combines employee deferrals with employer profit-sharing — at $50K-$200K of self-employment income, this typically exceeds SEP capacity. Roth deferrals available. Annual Form 5500-EZ required when balance exceeds $250,000. Cannot have employees other than spouse.
SIMPLE IRA: small employer
Designed for employers with up to 100 employees. Employee deferrals plus employer match (3% dollar-for-dollar) or nonelective (2% of compensation). Lower contribution limits than 401(k). Easy to set up using IRS Form 5305-SIMPLE or 5304-SIMPLE.
When to switch
A solo SEP works fine until you hire an employee — then it becomes expensive because you must contribute equally for the employee. At that point, switching to a SIMPLE IRA (lower employer cost) or a small-employer 401(k) (more flexibility) is usually the right move.
After-tax mega-backdoor
Some solo 401(k) plan documents permit after-tax contributions and in-plan Roth conversions, enabling the "mega backdoor Roth" — contributing tens of thousands of additional dollars per year that grow tax-free in the Roth subaccount. Confirm with your provider before assuming this feature is available.
Common mistakes worth avoiding
The recurring mistakes filers make on this topic cluster in three patterns: (1) optimizing for current-year tax at the expense of multi-year tax, (2) treating the choice as binary when the IRS framework actually allows nuance (partial elections, hybrid methods, year-by-year reassessments), and (3) deferring the analysis until the return is due rather than running it during the year when the result can still influence behavior. A short annual review — even thirty minutes — catches all three failure modes and replaces vague intuition with documented reasoning.
When to bring in a professional
DIY tax software handles most small-business returns competently, but a handful of situations reliably justify a CPA or enrolled agent: an entity formation or election, a multi-state filing situation, a significant fixed-asset purchase that triggers Section 179 or bonus depreciation modeling, a retirement-plan setup, an IRS notice or examination, and the year of an entity sale. Outside those situations, software plus an annual half-day of personal review produces a defensible return. The cheapest professional engagement is a one-hour consultation rather than a full-service tax-prep relationship.