There is a particular kind of regret that visits freelancers in April. You did the work, you got paid, you set aside what you could—and then you watch a sizable chunk leave your account anyway, with nothing to show for it but a confirmation number. A W-2 employee rarely feels this, because their retirement contributions were quietly skimmed off every paycheck before the money ever felt like theirs. Nobody set that up for you. So the question worth asking isn't only how do I pay less tax, but how do I turn money I'd lose anyway into money I keep.

That is exactly what a self-employed retirement account does. Contributions you make as the "employer" come off your income before tax is calculated, which means a dollar saved for your future is a dollar the IRS no longer touches this year. The two most common vehicles for freelancers are the SEP-IRA and the solo 401(k). They sound interchangeable. They are not. And for most people earning a moderate, irregular freelance income, the solo 401(k) shelters substantially more.

The mechanism: same goal, different math

Both accounts reduce your taxable income through deductible contributions. The difference is how each one calculates the ceiling.

A SEP-IRA has a single lever: an employer contribution capped at 25% of your compensation. For someone who is both employer and employee—you—that works out to roughly 20% of your net self-employment income after the deductible half of your self-employment tax is subtracted. There is no second source of contributions. Whatever 20%-ish comes to, that's your maximum.

A solo 401(k) has two levers stacked on top of each other. First, an employee salary deferral—a flat dollar amount you can contribute regardless of how high your income is. For 2025 that deferral limit is $23,500 (with an additional catch-up if you're 50 or older). Second, the same employer profit-sharing contribution the SEP offers, up to that ~20% of net earnings. The two combined can reach the overall defined-contribution limit, which for 2025 is $70,000.

The flat employee deferral is the whole story. It doesn't scale with income—it's a fixed allowance you get simply for participating. And at moderate income levels, a fixed allowance is worth far more than a percentage.

Why this matters most at moderate income

Run the numbers and the gap becomes obvious.

Suppose you net $80,000 from freelancing in a year. With a SEP-IRA, your contribution is capped at roughly 20% of net earnings—call it about $15,000. That's the entire ceiling.

With a solo 401(k), you start with the same ~$15,000 employer piece, but you can also add the employee deferral of up to $23,500 on top. Your sheltered total jumps to nearly $38,500—more than double. Same income, same business, same year. The only difference is which account you opened.

The SEP only catches up to the solo 401(k) at high incomes, where 25% of a large number finally exceeds the flat deferral plus profit-sharing. Until you're earning well into six figures, the solo plan wins, often dramatically. This is the part nobody tells freelancers: the conventional advice to "just open a SEP, it's simpler" quietly costs moderate earners thousands in foregone deductions every year.

What you're actually doing to your tax bill

Here's the piece that connects to your quarterly payments. Deductible retirement contributions reduce your income tax, because they lower your adjusted gross income. If you shelter an extra $23,000 through a solo 401(k) and you're in the 22% bracket, that's roughly $5,000 less in federal income tax—money that stays invested for you instead of disappearing.

One honest caveat, because precision matters here: these employer-side contributions lower your income tax, not your self-employment tax. The 15.3% that funds Social Security and Medicare is calculated on your net earnings before retirement contributions, so it doesn't shrink. Anyone who promises a retirement plan will cut your SE tax is selling something. What the deduction does is take a real bite out of the income-tax layer—usually the larger of the two for most freelancers—and that's a bite worth taking.

Because this lowers your projected income tax, it also lowers the estimated payments you owe across the year. A contribution you plan to make is a contribution you can factor into your quarterly math now, rather than discovering the benefit only at filing.

The reframe that makes it stick

There's a reason this is hard to act on, and it isn't ignorance—it's how the human mind weighs costs. Behavioral economists describe present bias: we discount future rewards steeply against present ones, so $23,500 you could spend today feels more vivid than a comfortable retirement decades away. Layer on loss aversion—the well-documented tendency to feel a loss about twice as intensely as an equivalent gain—and a tax payment registers as a sharp, immediate loss while retirement savings feel like a vague, deferred gain.

The solo 401(k) quietly flips that framing. The money leaves your checking account either way—as tax, or as savings. But routed into the account, the "loss" becomes an asset with your name on it. You're not giving anything up; you're moving it from a column you'll never see again into a column you own. Reframed that way, the contribution stops feeling like deprivation and starts feeling like the closest thing a freelancer has to the automatic, painless saving a salaried job provides.

The deadlines that trip people up

Timing is where good intentions die, and the two accounts behave differently.

A SEP-IRA is forgiving: you can open and fund it as late as your tax filing deadline, including extensions. That makes it a genuine backward-looking lever—you can lower last year's bill after the year is over.

A solo 401(k) is stricter about the part that matters most. Thanks to recent rule changes you can establish the plan up until your filing deadline and still make employer contributions for the prior year—but the employee salary deferral, the flat allowance that gives the solo plan its edge, generally has to be elected by December 31. Miss that, and you lose the very feature that made the account worth choosing.

The practical takeaway: if the solo 401(k) is your plan, open it and set your deferral intention before year-end, even if you fund it later. Treat December 31 as the real deadline, not April.

Choosing without overthinking it

If your freelance net income is moderate—say, under roughly $150,000—and you want to shelter as much as possible, the solo 401(k) almost always wins, provided you don't have employees other than a spouse. If you value pure simplicity, contribute less, or want the flexibility to decide after the year ends, the SEP-IRA is clean and effective. Both beat doing nothing by a wide margin, and neither is a decision you have to make alone or all at once.

What you do need is to see the contribution as part of your tax math, not separate from it. That's where it connects to the daily reality of freelancing. Payday reads your actual income from your connected Stripe and bank accounts and works out your Q1–Q4 estimated payments, so when you decide to route money into a solo 401(k) or SEP, you can see how it changes what you owe each quarter—not as a surprise next April, but as a number you control now. It nudges you before each deadline and hands you a TurboTax-ready file at year-end, so the planning and the paying live in the same place.

The regret in April isn't really about the money leaving. It's about watching it leave with nothing to show for it. This is the rare lever that lets you decide where it goes. See how it changes your quarterly numbers at https://payday.lumenlabs.works.