By Christopher Krzus, CFP® / Wolfstone Wealth
If you run your own business or work for yourself, you already know the tradeoff: no employer is handling your taxes or your retirement plan, which means both decisions sit with you. The upside is that self-employment can open the door to stronger retirement plan options than most W-2 employees have access to — but only if you choose the right one.
The Choice Most Business Owners Get Wrong
Two options come up constantly: the SEP IRA and the Solo 401(k). Both allow you to set aside meaningfully more than a standard IRA. Where they differ is in how much you can actually contribute — and for many high earners, that difference is substantial.
A SEP IRA generally lets you contribute up to 25% of compensation, subject to the overall annual limit. A Solo 401(k), by contrast, lets you contribute as both “employee” and “employer.” At many income levels, that structure allows you to reach the maximum contribution faster than a SEP IRA permits. If you’re not maxing out every year, the difference is not a rounding error — it compounds over time.
Solo 401(k)s also frequently offer a Roth contribution option and, in some plans, the ability to take loans. SEP IRAs do not. If a spouse works in the business, a Solo 401(k) can often cover both of you, which effectively increases the household’s total contribution room. (For more on how Roth strategy and other tax moves fit into this, see our Tax Planning approach.)
None of this makes the SEP IRA a poor choice. It is simpler to set up and maintain, and for some business structures that simplicity is worth more than the extra contribution flexibility. The real issue is that many business owners simply choose whichever plan their accountant mentioned first, without ever running the numbers against their own income and goals.
Estimated Taxes Still Run on Their Own Schedule
Whatever retirement plan you select, quarterly estimated tax payments remain due on their own timeline. As a business owner, there is no employer withholding to smooth this out. Missing a quarter or underestimating what you owe can lead to penalties on top of the tax itself. This is worth reviewing every quarter rather than only once a year when the accountant asks.
Keep Business and Personal Finances Separate
One habit that prevents more problems than people expect is keeping separate accounts and cards for business activity. It is not just cleaner bookkeeping — it makes it much easier for you and your accountant to identify legitimate business deductions without having to untangle a year of mixed transactions after the fact.
The Real Opportunity
Running your own business means the retirement and tax decisions that a W-2 employee never has to think about are now entirely yours. The upside is real: business owners often have access to higher contribution limits and more planning flexibility than employees do. The catch is that none of it happens automatically. It only works if someone is actually running the numbers against your specific income and goals.
Frequently Asked Questions
What’s the main difference between a Solo 401(k) and a SEP IRA?
A SEP IRA generally allows contributions of up to 25% of compensation. A Solo 401(k) allows contributions as both employee and employer, which often results in a higher total contribution at many income levels, along with options (such as Roth contributions or a spousal plan) that a SEP IRA does not offer.
Which one lets me save more?
It depends on your income and business structure, but at many income levels a Solo 401(k) allows a higher total contribution than a SEP IRA for the same earnings. It is worth running the actual numbers rather than assuming.
Do I need to make quarterly estimated tax payments as a business owner?
Yes. Without employer withholding, quarterly estimated payments are generally required to avoid underpayment penalties, regardless of which retirement plan you choose.
Should I keep separate accounts for my business?
Yes. Separate accounts and cards make it far easier to substantiate legitimate business deductions and avoid mixing personal and business expenses, which can create unnecessary problems at tax time.
Not sure which retirement plan fits your situation?
That’s exactly what the first conversation is for. Schedule a 20-minute introductory call — no paperwork, no pitch. wolfstonewealth.com/contact | 630-640-3582
