The Five-Minute Retirement Plan
The SEP IRA is the fastest retirement plan to set up, and for many freelancers it is the only one worth the effort. There is no plan document to draft, no IRS filing, and no December 31 deadline. You can open one in five minutes online and fund it as late as your extended tax filing deadline. If you are reading this in March 2027 and still want a 2026 deduction, the SEP IRA is your move.
The trade-off for that simplicity is a single contribution bucket: employer-only, capped at 25% of compensation or $69,000 for 2026. There is no employee deferral, no Roth option, and no loan provision. But for high-earning freelancers who want maximum deduction with minimum paperwork, the SEP IRA delivers.
Step-by-Step Setup
- 1. Pick a brokerage. Fidelity, Vanguard, and Schwab all offer no-fee SEP IRAs with broad investment menus. Pick whichever you already use for other accounts to keep things simple.
- 2. Open the SEP IRA account online. Takes about five minutes. You will provide your name, SSN, and business info (an EIN is recommended even for sole proprietors).
- 3. Sign Form 5305-SEP. This one-page IRS form is the plan document. The brokerage provides a pre-filled version. Once signed, your plan exists.
- 4. Fund the contribution. Transfer from your business checking by your filing deadline. Invest the balance in your chosen funds.
- 5. Report on your tax return. The contribution is deductible on Schedule 1, Line 16. No separate plan filing with the IRS.
The Contribution Math
The SEP IRA limit is 25% of compensation or $69,000, whichever is lower. For a sole proprietor, "compensation" is not your raw Schedule C profit. The IRS formula backs out half of self-employment tax and the contribution itself, which lands the effective rate at roughly 20% of adjusted net earnings. Here is what that looks like in practice:
| Net SE Profit | Effective SEP Contribution (≈20%) | Federal Tax Saved at 24% |
|---|---|---|
| $100,000 | $18,000 | $4,320 |
| $200,000 | $40,000 | $9,600 |
| $350,000 | $69,000 (capped) | $16,560 |
A $200,000 consultant contributes about $40,000 and saves roughly $9,600 in federal income tax at the 24% bracket — plus state tax savings on top. You only hit the $69,000 cap once profit approaches $345,000, because 20% of that is $69,000.
The Employee Rule
The SEP IRA's biggest limitation is the employee contribution requirement. If you have any eligible employees — generally anyone 21 or older who worked for you in 3 of the last 5 years and earned at least $750 — you must contribute the same percentage of compensation for them as for yourself. Contribute 20% for yourself and you owe 20% of each eligible employee's compensation too.
For a true solo operator with no employees (or only a spouse you can exclude through a separate plan), this is a non-issue. But one $50,000 employee can turn a $40,000 personal deduction into a $50,000 total cost. I always ask new clients about hiring plans before recommending a SEP IRA.
When to Use a SEP IRA
The SEP IRA is the right choice in three scenarios: you earn enough (roughly $300,000+) that you will hit the $69,000 cap anyway, so the Solo 401k's extra employee bucket adds nothing. You want the simplest possible plan with no IRS filings. Or you missed the December 31 Solo 401k deadline and need a last-minute 2026 deduction you can still make by October 15, 2027.
The Bottom Line
Open a SEP IRA in five minutes at any major brokerage, sign Form 5305-SEP, and fund up to 25% of compensation ($69,000 cap) by your extended filing deadline. A $200,000 freelancer saves about $9,600 in federal tax. Just confirm you have no eligible employees before contributing, and compare against the Solo 401k if your profit is under $300,000. Model the full deduction with the Self-Employment Tax Calculator and verify eligible contributions with the Tax Deduction Finder.