SEP, SIMPLE or Solo 401(k): Choosing a Plan for a Small Business

Every figure here is for tax year 2026. They are indexed and they move, so a number remembered from a conversation two years ago is not a number to plan against.

The question is usually asked as "which is best", and the honest answer is that it depends on two things: how much you want to put away, and whether you have employees. Capacity and cost pull in opposite directions, and the plan that suits a sole proprietor with a good year is often the wrong plan for the same business two hires later.

The three plans

The arithmetic people get wrong

For an unincorporated business, the employer contribution is not 25% of your profit. It is 25% of compensation, and for a self-employed person the compensation figure is net earnings from self-employment reduced by the deductible part of self-employment tax and by the contribution itself. The circularity works out to roughly 20% of net earnings before the contribution.

That difference is large enough to matter. An owner who budgets 25% of a $200,000 profit and contributes accordingly has made an excess contribution, which is a correctable problem and a tedious one.

For an S corporation, the base is your W-2 wages, not distributions and not total profit. That connects the retirement plan decision to the reasonable compensation decision — set wages low to reduce payroll tax and you have also reduced the amount you can put into a plan.

Credits that offset the cost

Setting up a plan is cheaper than it used to be, and this is under-claimed:

• Startup costs: employers with 50 or fewer employees can claim 100% of eligible startup costs, and those with 51 to 100 employees can claim 50%, up to $5,000 a year for three years. The annual amount is the greater of $500, or the lesser of $250 per non-highly compensated employee eligible to participate and $5,000.
• Employer contributions: for employers with 1 to 50 employees, an additional credit of up to $1,000 per employee across five years, at 100% in the first two years and tapering to 25% in the fifth.
• Automatic enrollment: $500 per year for a three-year period for adding an eligible automatic contribution arrangement.

Roth, and why it now matters here

SECURE 2.0 opened Roth treatment to employer contributions in several of these plans and to SEP and SIMPLE contributions. Whether that helps depends on the same question it always did — whether your rate now is higher or lower than your rate when the money comes out — and in South Carolina that question changed this year, because H. 4216 rewrote the state rate structure for 2026. A projection built on the old state brackets is answering a question that no longer exists.

How to actually decide

• No employees, and you want the largest possible contribution: solo 401(k). Decide before December 31.
• No employees, the year is already over, and you need something now: SEP, up to the extended due date.
• Employees, and you want them to be able to save without an open-ended employer cost: SIMPLE, established by October 1 for that year.
• Employees, higher contribution targets and willingness to carry a real plan: a full 401(k) with the testing and administration that comes with it — beyond the scope of this piece, but the right destination for a growing payroll.

This describes how the plans work, not which one fits you. The fit depends on your entity, your payroll, your profit and what you want the business to look like in three years, and those are facts that have to be read rather than assumed.