Solo 401(k) vs SEP-IRA for Locums
This is the biggest lever a locum has, and it is routinely reached for after the S-corp question rather than before it. A solo 401(k) can shelter up to $72,000 in 2026, requires no entity, no payroll and no extra tax return, and at physician income the tax saved dwarfs anything an S-corporation election produces.
Here are the 2026 limits, the arithmetic everyone gets wrong, and one effect specific to physicians that can make a contribution worth considerably more than your marginal rate.
The 2026 limits
From IRS Notice 2025-67:
| Limit | 2026 |
|---|---|
| § 402(g) elective deferral (the "employee" side) | $24,500 |
| Catch-up, age 50 and over | +$8,000 |
| SECURE 2.0 "super" catch-up, ages 60–63 | +$11,250 |
| § 415(c) total annual additions (employee + employer) | $72,000 |
| § 401(a)(17) compensation cap | $360,000 |
So a locum under 50 can add up to $72,000; at 50 or over, $80,000; at 60 to 63, $83,250. The catch-up sits on top of the § 415(c) limit rather than inside it.
The two plans, in one paragraph each
SEP-IRA. Employer contributions only. As a sole proprietor you can contribute 25% of compensation — which for someone with no W-2 works out to 20% of net profit after half your self-employment tax — up to $72,000. Trivially easy to open, no annual filing at any asset level, and you can establish and fund it right up to your extended filing deadline.
Solo 401(k). You are both employer and employee, so you get both sides: the $24,500 elective deferral plus the same ~20%-of-net-profit employer contribution, capped together at $72,000. It also allows Roth deferrals, permits loans at most providers, and has no impact on the backdoor Roth. It requires a plan document, and once assets exceed $250,000 an annual Form 5500-EZ.
The arithmetic everyone gets wrong
"25% of compensation" is the statutory figure, and it is not 25% of your net profit. For a self-employed person, compensation means net earnings after the deduction for half of self-employment tax and after the contribution itself. Solving that circularity turns 25% into 20% of (net profit − half of SE tax).
On $312,000 of net profit with $15,617 of deductible SE tax, the employer contribution is 20% × $296,383 = $59,277, not 25% × $312,000 = $78,000. People who use the wrong number over-contribute and have to unwind it.
What each plan allows, by profit level
Single filer, sole proprietor, no other retirement plan, under 50:
| Net profit | Half of SE tax | SEP-IRA max | Solo 401(k) max | Solo advantage |
|---|---|---|---|---|
| $100,000 | $7,065 | $18,587 | $43,087 | +$24,500 |
| $150,000 | $10,597 | $27,881 | $52,381 | +$24,500 |
| $200,000 | $14,117 | $37,177 | $61,677 | +$24,500 |
| $250,000 | $14,787 | $47,043 | $71,543 | +$24,500 |
| $312,000 | $15,617 | $59,277 | $72,000 | +$12,723 |
| $400,000 | $16,795 | $72,000 | $72,000 | $0 |
The pattern is clean. Below roughly $250,000 of net profit the solo 401(k) shelters exactly $24,500 more, because the elective deferral is pure additional room. From there the § 415(c) cap starts binding and the advantage narrows, reaching zero around $400,000 where the SEP alone maxes out.
That makes the choice easy for most people: if your net profit is under about $400,000, the solo 401(k) dominates. Above it, the two are identical on contribution room and you choose on other grounds.
What a full contribution is actually worth
Take the same physician: $336,000 gross, $24,000 of business expenses, $312,000 net profit, single filer, Texas. Contributing the full $72,000 to a solo 401(k):
| No contribution | $72,000 contributed | |
|---|---|---|
| Self-employment tax | $32,027 | $32,027 |
| Federal income tax | $66,868 | $33,604 |
| Total tax | $98,895 | $65,631 |
$33,265 of tax saved on a $72,000 contribution — an effective rate of 46%. The money is not spent; it has moved into an account you own. The out-of-pocket cost of putting $72,000 away is $38,735.
Note the first row. Self-employment tax is identical. A retirement contribution is deducted on Form 1040, below Schedule C net profit, so it never touches self-employment tax. Only business expenses do that.
Why the saving beats the bracket — the QBI phase-in effect
46% is higher than the 35% top bracket this physician is in, and that is not an error. Medicine is a specified service trade or business under § 199A(d)(2)(A), so the 20% QBI deduction is zero above $276,775 of taxable income for a single filer in 2026. Without the contribution, taxable income is $280,283 — just over the cliff, deduction zero.
The $72,000 contribution drops taxable income to $208,283, back inside the phase-in range, which restores about $37,400 of QBI deduction that did not exist before. So the contribution buys a bracket-rate saving and resurrects a deduction. For a physician sitting just above the § 199A ceiling, the first dollars of a retirement contribution are the most valuable dollars in the tax code — and this is worth far more than an S-corp election. Fill this first.
The tie-breakers, if you are still choosing
| Solo 401(k) | SEP-IRA | |
|---|---|---|
| Contribution room under $400k profit | Higher by up to $24,500 | Lower |
| Roth option | Yes, on deferrals | Effectively no |
| Effect on a backdoor Roth | None — 401(k) balances are outside the pro-rata rule | Blocks it — SEP balances count under § 408(d)(2) |
| Loans | Permitted at most providers | Not permitted |
| Age 50+ catch-up | Yes, +$8,000 | No |
| Admin | Plan document; Form 5500-EZ above $250,000 of assets | None |
| Deadline to establish | Employer side by the filing deadline; deferrals need the plan in place in the plan year | Up to the extended filing deadline |
| If you hire an employee | Coverage rules bite — plan needs redesign | Must cover eligible employees on the same terms |
The backdoor Roth row is the one that catches physicians. A SEP-IRA balance is counted in the pro-rata calculation when you convert non-deductible IRA money, which can make a backdoor Roth partly taxable for as long as the balance exists. Solo 401(k) balances are not. Anyone doing a backdoor Roth each year should default to the solo 401(k) for this reason alone.
Timing traps for a locum year
- The elective deferral needs a plan in place during the plan year. SECURE 2.0 lets a sole proprietor adopt a plan and make employee deferrals for the prior year up to the unextended filing deadline in limited first-year circumstances, but the safe practice is simply to open the plan by 31 December. Providers take a few weeks; do it in the autumn, not on New Year's Eve.
- The employer contribution can wait until your filing deadline including extensions, which is genuinely useful when your final net profit is not known until the books close.
- A part-year locum with W-2 income elsewhere shares one $24,500 elective deferral limit across all plans. The employer side is per-business and is not shared, but the "controlled group" rules can aggregate businesses you own — worth a question to your CPA if you have more than one.
- Contribute in a good year, not evenly. Locum income is lumpy. The contribution is worth most in a high-profit year, and especially in a year where it drags taxable income back under the § 199A ceiling.
And after that
Filling a solo 401(k) is the first move, not the last. Once it is maxed, the usual next steps for a high-earning independent clinician are a backdoor Roth IRA, an HSA if you are on a qualifying high-deductible plan (triple tax advantage, and the only account with no worse treatment than a 401(k)), and then a taxable brokerage account. A cash balance or defined benefit plan can shelter far more again, but only makes sense with sustained high profit and a willingness to commit to funding it for several years — that is a conversation with an actuary and a CPA.
The ordering point is the one worth remembering: at $312,000 of profit the solo 401(k) saves $33,265 a year. The best S-corp case in our S-corp analysis saves about $8,900, and only with an aggressive salary. If you have not filled the retirement plan, the S-corp question is premature.
Sources
- Internal Revenue Service, Notice 2025-67 — 2026 retirement plan cost-of-living adjustments.
- Internal Revenue Service, One-Participant 401(k) Plans and SEP Plans.
- Internal Revenue Service, Publication 560, Retirement Plans for Small Business — including the rate table that converts 25% into 20% for a self-employed person.
- 26 U.S.C. § 415(c), § 402(g), § 401(a)(17).
- 26 U.S.C. § 408(d)(2) — the aggregation rule that makes a SEP balance interfere with a backdoor Roth.
- 26 U.S.C. § 199A and IRS Revenue Procedure 2025-32 — the 2026 threshold amounts behind the phase-in effect described above.
- SECURE 2.0 Act of 2022 — retroactive plan adoption and the ages 60–63 catch-up.
Worked figures are produced by this site's own calculator using 2026 parameters and are illustrative. Contribution limits depend on your full circumstances, including any other plan you participate in; confirm your own maximum with your plan provider or CPA before contributing.
See your own contribution room
The locum take-home calculator estimates your solo 401(k) capacity from your net profit and shows what a contribution does to your tax — and what it does not do to self-employment tax.