SEP-IRA and Solo 401(k): Check Your Contribution Limit First
Self-employed workers don't automatically get a 401(k) match from an employer, but plans like the SEP-IRA and Solo 401(k) let you deduct retirement contributions directly from your taxable income. A SEP-IRA lets you contribute up to 25% of your net self-employment earnings, capped at an annual IRS dollar limit ($70,000 for 2025). This deduction is "above the line," meaning it reduces your AGI whether or not you itemize. Because it's tied to your marginal tax bracket, the same dollar contribution saves more in taxes for someone in a higher bracket than someone in a lower one — so it's worth running the numbers for your specific income.
How the Tax Savings Are Calculated
| Step | Item | Formula |
|---|---|---|
| 1 | Contribution Limit | Lesser of 25% of income or $70,000 |
| 2 | Deductible Amount | Lesser of contribution or limit |
| 3 | Marginal Rate | Your federal marginal tax bracket |
| 4 | Tax Savings | Deductible Amount × Marginal Rate |
This is a simplified federal-only estimate that doesn't account for state income tax, self-employment tax, or Solo 401(k) employee deferral limits. Confirm current-year IRS limits and consult a tax professional before contributing.
Frequently Asked Questions
The lesser of 25% of net self-employment earnings or the IRS annual cap ($70,000 for 2025) — confirm the current-year figure.
No, it's an above-the-line deduction reducing your AGI, available even with the standard deduction.
Excess amounts aren't deductible and may trigger a 6% IRS excise tax until corrected.
※ Federal estimate only. IRS limits change most years — verify the current cap and consult a tax professional.