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SEP-IRA vs Solo 401(k) for a Self-Employed Mechanic: 2026 Limits Compared

Updated 2026-10-17. Sources are listed at the end.

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Working for yourself means no employer 401(k) match. But the IRS lets self-employed people use plans that can shelter far more than an ordinary IRA, and the contributions reduce taxable income. For a one-person mobile mechanic business, the two common options are the SEP-IRA and the one-participant (solo) 401(k).

2026 limits at a glance

SEP-IRASolo 401(k)
“Employee” deferralNot allowedUp to $24,500 (or 100% of earned income, if less)
“Employer” contributionUp to 25% of compensationUp to 25% of compensation (adjusted for self-employed)
Overall cap (excluding catch-up)$72,000$72,000
Catch-up, age 50+Not allowed$8,000 (ages 60–63: $11,250)
Annual IRS filingNo Form 5500Form 5500-EZ once plan assets reach $250,000
EmployeesMust generally include eligible employeesOwner (and spouse) only, no other employees

Sources: IRS, SEP contribution limits; IRS, 401(k) contribution limits; IRS, One-participant 401(k) plans.

With catch-up contributions, the IRS says the solo 401(k) total can reach $80,000, or $83,250 for ages 60 to 63.

“Compensation” is not your gross, or even your Schedule C profit

For a self-employed person, the IRS says plan compensation starts from net earnings from self-employment, which you then reduce by:

(IRS, Calculating your own retirement plan contribution)

Because the contribution reduces the compensation it’s based on, the “25%” works out lower for a sole proprietor than for an employee. The IRS provides worksheets and rate tables in Publication 560 for the exact figure. Use them or tax software rather than guessing.

Why the solo 401(k) often wins at mechanic-level incomes

The SEP is limited to the employer-style percentage of compensation. The solo 401(k) adds the employee deferral on top: up to $24,500 in 2026 even when your profit is modest.

Illustration (approximate; use the IRS worksheet for real numbers): say your net profit is $60,000. The employer-style contribution comes to about $11,000: profit minus the deductible half of SE tax (about $4,240) is about $55,760, times 20%. The 20% is 25% ÷ 1.25, which reflects the self-contribution adjustment. The SEP stops there. The solo 401(k) allows about the same employer piece plus up to $24,500 in deferrals, as long as the total stays within the overall limit and your earned income. For someone who wants to save aggressively, that’s a big difference.

When a SEP makes sense

Fitting retirement into your pricing

A retirement contribution is pay for future you. If your labor rate only covers this year’s bills, there’s nothing left to save. In the labor rate & break-even calculator, make “owner pay” large enough to include a savings target. Then check that your posted rate still lands near the market labor rate data.

Contributions also reduce QBI, so they slightly lower the QBI deduction, and they affect your quarterly estimates.

Sources