SEP-IRA & Solo 401(k) Retirement Plans for 1099 Taxpayers
In short: SEP-IRA and solo 401(k) contributions for self-employed individuals are deductible above the line on Schedule 1, reducing your overall taxable income.
How Self-Employed Retirement Deductions Work
When you contribute to a SEP-IRA or a solo 401(k), the money you put away for your own retirement is treated as an adjustment to income. This means the deduction is taken above the line on Schedule 1 of Form 1040, specifically on line 16, rather than being deducted directly on your Schedule C. Keeping this distinction clear ensures your net profit from self-employment remains accurate while your overall taxable income drops. Because these contributions directly lower your federal tax liability, they are among the most effective tax-planning strategies available to independent earners.
Comparing SEP-IRA and Solo 401(k) Options
Selecting the right plan depends heavily on your business revenue and savings goals. Annual contribution limits apply and are adjusted for inflation to maintain their real-world value. A solo 401(k) can often allow larger contributions at lower income levels because it lets you contribute as both the employer and the employee, unlocking higher caps early on. A SEP-IRA, by contrast, relies strictly on employer contributions calculated as a percentage of your net earnings from self-employment. Evaluating your yearly cash flow will help you decide which structure maximizes your retirement savings.
Meeting Contribution Guidelines and Deadlines
To claim your deduction correctly, you must calculate your allowable contribution based on your net earnings from self-employment minus half of your self-employment tax. For the 2026 tax year, the self-employment tax rate sits at 15.3%, with Social Security capped at $184,500. Staying compliant with IRS guidelines means establishing and funding your account within the statutory deadlines, which often extend up to your tax filing deadline including extensions. Meticulous recordkeeping of your business income throughout the year ensures your calculations remain precise and defensible.
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What the Proofly receipt scanner does — and doesn’t
Does
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- Maps business expenses to Schedule C lines (meals already at 50%)
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Doesn’t
- File your taxes or give tax advice
- Sync live with QuickBooks or Xero (it’s CSV export)
- Pull transactions from your bank automatically
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- Guarantee how an audit turns out
Frequently asked questions
Where do I report my retirement plan deduction on my tax return?
You report the deduction for your own contribution on Schedule 1 of Form 1040, specifically on line 16, rather than claiming it directly on your Schedule C.
What is the primary difference between a SEP-IRA and a solo 401(k)?
A solo 401(k) allows you to contribute as both employer and employee, which can enable larger contributions at lower income levels compared to a SEP-IRA.
Are self-employed retirement contribution limits adjusted annually?
Yes, annual contribution limits for both SEP-IRAs and solo 401(k) plans apply and are indexed for inflation by the IRS each year.
Does my deduction reduce my self-employment tax?
No, the deduction is taken above the line on Schedule 1 to reduce your income tax, but it does not reduce your net earnings subject to self-employment tax on Schedule SE.
Sources
This guide summarizes IRS guidance as of October 28, 2026 for planning purposes. It isn’t tax advice — confirm your situation with IRS.gov or a qualified tax professional.