A profitable year on eBay or Shopify creates a problem most resellers never plan for: there's no employer 401(k) match, no HR benefits page, nothing withheld automatically. Whatever you do about retirement, you have to set up yourself — and the two plans built for exactly this, the Solo 401(k) and the SEP-IRA, get lumped together constantly even though they're not interchangeable. Every dollar limit tied to both went up for 2026, and a SECURE 2.0 provision that's been all over retirement-plan news this year adds a wrinkle that, for most sole proprietors, turns out not to matter at all.
The 2026 numbers
Per IRS Notice 2025-67, the cost-of-living adjustments that took effect January 1, 2026:
- Employee elective deferral (Solo 401(k) only): $24,500, up from
- $23,500
- Standard catch-up, age 50+: $8,000, up from $7,500
- Enhanced catch-up, ages 60–63 (the SECURE 2.0 "super catch-up"):
- $11,250, unchanged from 2025
- Overall annual additions limit (Section 415(c)), both plans: $72,000,
- up from $70,000
- Annual compensation limit (Section 401(a)(17)): $360,000, up from
- $350,000
- Social Security wage base, relevant for the self-employment tax math
- below: $184,500, up from $176,100
A SEP-IRA and a Solo 401(k) share the same $72,000 overall cap and the same $360,000 compensation ceiling. Where they actually diverge is the $24,500 employee deferral — a SEP-IRA doesn't have one at all.
One identical formula, one plan that adds something on top
Both plans let you make an employer-side contribution, and for a self-employed person with no common-law employees, that side is calculated exactly the same way in either plan. A SEP can contribute up to 25% of compensation; for a sole proprietor, "compensation" isn't your raw net profit — it's net profit minus the deduction for one-half of your self-employment tax, and because your own contribution is itself deductible, the calculation is circular. The IRS resolves that in Publication 560, chapter 5, by converting the 25% plan rate into a 20% effective rate applied directly to that adjusted number (25% ÷ 1.25 = 20%). A Solo 401(k)'s employer-side "profit-sharing" contribution uses the identical 20% formula.
The only place a Solo 401(k) pulls ahead is the employee deferral — up to $24,500 (or $32,500 with the 50+ catch-up, $35,750 at ages 60–63), on top of the same employer-side amount a SEP would give you. A SEP-IRA never gets that piece, at any income level.
A worked example
Say your Schedule C shows $80,000 in net profit for 2026, your only self-employment income, and you're under 50.
- Net earnings from self-employment (for computing SE tax): 92.35% ×
- $80,000 = $73,880
- Self-employment tax: 15.3% × $73,880 = $11,304 (well under the
- $184,500 wage base, so the full rate applies)
- Half of SE tax, deductible: $5,652
- Compensation for retirement-plan purposes: $80,000 − $5,652 = $74,348
- Employer-side contribution at 20%: 20% × $74,348 = $14,870
That $14,870 is what a SEP-IRA gets you, full stop. A Solo 401(k) gets you the same $14,870 employer-side, plus the $24,500 employee deferral (comfortably under $74,348 in compensation, so nothing caps it) — $39,370 total, more than two and a half times the SEP number, from the same $80,000 in profit. At a 24% marginal rate, that $24,500 gap alone is roughly $5,880 in tax deferred this year that a SEP-IRA simply doesn't offer.
If you also have a W-2 job with a 401(k)
A lot of resellers are doing this alongside a day job, and the $24,500 employee deferral limit doesn't reset per plan — it's a per-person cap under Section 402(g) across every 401(k)-type plan you contribute to in the same year. Put $18,000 into a day-job 401(k) in 2026 and you have $6,500 of employee-deferral room left in a Solo 401(k), not another full $24,500. The 20% employer-side contribution from your reselling profit isn't affected by that at all — it's calculated against unrelated-employer compensation and stacks on top of whatever your day job's plan does independently.
The Roth catch-up rule everyone's talking about
SECURE 2.0 requires that catch-up contributions be made as Roth (after-tax) contributions for any participant whose prior-year FICA wages from the plan's sponsoring employer exceeded a threshold — $150,000 for 2026, comparing against 2025 wages, up from the original $145,000. Cross it and every dollar of your 2026 catch-up has to be Roth; the regular deferral below that can still be pre-tax.
The part that gets lost in the coverage: the trigger is specifically FICA wages, and a sole proprietor or single-member LLC owner taking home reselling profit doesn't have FICA wages from their own unincorporated business — that income is subject to self-employment tax instead, an entirely different mechanism. With nothing to compare against the $150,000 threshold, the rule has no trigger to pull, regardless of how much net profit you make. A reseller clearing $200,000 a year as a sole proprietor making catch-up contributions at 55 is unaffected by this rule; a reseller who elected S-corp taxation and pays themselves a $160,000 W-2 salary from that S-corp is squarely inside it, because that salary is real FICA wages from the plan's sponsoring employer. Whether the rule reaches you depends on your entity structure, not your income.
What this does to your QBI deduction
The employer-side contribution isn't free money sitting outside your tax return — it's one of the subtractions that turns net Schedule C profit into Qualified Business Income for the Section 199A calculation, the same way the deductible half of SE tax is. Put $14,870 into a SEP or Solo 401(k) this year and your QBI drops by that same $14,870, which shaves a little off the 20% QBI deduction even as the retirement contribution itself saves more in tax than that costs. It's not a reason to skip the contribution — the retirement deduction is worth more than the QBI sliver it trims — just a number worth knowing before you're surprised by it at filing time.
What to actually do
- Default to a Solo 401(k) over a SEP-IRA unless you specifically need a
- SEP's lighter paperwork or already have one open. The employer-side math
- is identical; the Solo 401(k) just adds the employee deferral on top, and
- there's no income level where a SEP wins outright.
- A Solo 401(k) has to be opened by December 31 of the year you want to
- contribute for, even though the contribution itself can usually be made up
- until your tax filing deadline. A SEP-IRA can be opened as late as the
- filing deadline. If you're setting this up for the first time in Q4, that
- deadline is the one that actually constrains you.
- **If you have a day-job 401(k), check what you've already deferred there
- in 2026** before assuming you have a full $24,500 of Solo 401(k) employee
- deferral room — it's one shared limit, not one per plan.
- **Don't assume the Roth catch-up rule reaches you just because you read
- about it.** It's keyed to FICA wages from the plan sponsor, not net
- profit — check your entity structure, not your income, to know if it
- applies.
PalmFlow tracks your real net Schedule C profit — sale price minus cost basis, platform fees, and shipping — which is the starting number this whole calculation runs from. It doesn't open a retirement account, calculate your contribution limit, or file anything; a Solo 401(k) or SEP-IRA provider and a CPA are the right tools for that part. Free plan, 50 items, no card.
Disclaimer: this is general information, not tax or investment advice. The 2026 limits above reflect IRS Notice 2025-67; whether a Solo 401(k) or SEP-IRA fits your situation, and how the Roth catch-up rule applies to your specific entity structure, depend on your full facts — confirm your numbers and plan choice with a CPA or retirement-plan provider before you contribute.