Why this decision matters for physicians with 1099 income

A meaningful share of physician income now arrives on a 1099 instead of a W-2: moonlighting shifts during residency or fellowship, locum tenens assignments, telemedicine panels, expert-witness testimony, medical directorships, and small side practices. That self-employment income carries a real advantage most fully employed physicians never get to use — the ability to open your own retirement plan and shelter a slice of it from current tax, on top of whatever your primary W-2 job already offers.

The two plans nearly everyone in this position considers are the solo 401(k) and the SEP IRA. They sound similar, but they are not equivalent — the difference is often several thousand dollars of contribution room, plus a quiet interaction that can wreck a backdoor Roth IRA you've been doing for years. This guide uses verified 2026 IRS numbers so a moonlighting resident, a locum attending, or a physician with expert-witness or telemedicine income can make an informed choice.

The plain-English basics of each plan

A SEP IRA (Simplified Employee Pension) is the simpler of the two. Per the IRS SEP plan page, a SEP lets a business — including a one-person business — make an employer contribution to a traditional IRA set up in the owner's name. Setup is minimal: most brokerages let you open one in minutes using the IRS model document (Form 5305-SEP), there is generally no annual Form 5500 filing, and you can establish and fund a SEP as late as your tax-filing deadline (including extensions) for the prior year.

A solo 401(k) — sometimes called a one-participant 401(k) or individual 401(k) — is a regular 401(k) plan covering a business owner with no common-law employees other than a spouse. The IRS describes it on its one-participant 401(k) page. Unlike a SEP, it lets you contribute in two capacities — the mechanic that drives most of the dollar difference between the two plans, covered next.

Employee vs. employer contributions — the mechanics that matter

This is the part that actually explains the dollar difference between the two plans.

• SEP IRA — employer contribution only. There is no employee deferral option. The contribution is computed entirely as an employer contribution, capped at 25% of compensation. For a self-employed physician, "compensation" is net earnings from self-employment after subtracting one-half of self-employment tax and the plan contribution itself — a circular adjustment that brings the SEP's effective rate down to roughly 20% of net self-employment earnings, not the headline 25%.
• Solo 401(k) — employee deferral, then employer profit-sharing on top. You defer the flat employee amount first (the same dollar limit that applies to any 401(k) participant regardless of income), then the business adds an employer profit-sharing contribution using the identical compensation definition and ~20% effective rate as the SEP. Because the employee deferral is a flat dollar amount rather than a percentage of profit, it doesn't shrink at lower income.

The practical effect: at low-to-moderate 1099 income — most moonlighting residents and part-time locums — the flat employee deferral can dwarf what a SEP alone produces. At very high, stable self-employment income, both plans converge toward the same overall IRC §415(c) ceiling. Few physicians moonlighting on the side are anywhere near that ceiling, which is exactly the range where the solo 401(k)'s advantage is largest.

Verified 2026 IRS contribution limits

The figures below are drawn directly from IRS Notice 2025-67, the annual cost-of-living adjustment notice the IRS published in November 2025 covering the 2026 plan year. Always cross-check the current figures on IRS.gov before contributing, since these numbers are set annually and can change with future guidance.

• 401(k)/solo 401(k) employee elective deferral (2026): $24,500.
• Catch-up contribution, age 50+ (2026): an additional $8,000.
• Enhanced catch-up, ages 60–63 (2026): an additional $11,250 (in place of the standard $8,000 catch-up), under a SECURE 2.0 provision.
• IRC Section 415(c) overall defined-contribution limit (2026): $72,000 — this is the combined employee-plus-employer ceiling for a solo 401(k), and it is also the dollar cap for a SEP IRA contribution, before any age-50 catch-up is added.
• SEP IRA contribution (2026): up to 25% of compensation, capped at the same $72,000 Section 415(c) dollar limit.
• Compensation cap used for SEP/401(k) employer contribution calculations (2026): $360,000, under Section 401(a)(17).

One nuance worth flagging because it will show up in physician-finance discussions this year: SECURE 2.0 requires that catch-up contributions be made on a Roth (after-tax) basis for any participant whose prior-year FICA wages from the plan's sponsoring employer exceeded a threshold — $150,000 for determining 2026 catch-up treatment, per Notice 2025-67 (up from the $145,000 figure originally set in the statute). The final regulations generally apply this requirement to contributions in taxable years beginning after December 31, 2026. This rule is about wages from an employer-sponsored plan and is most relevant to a high-earning physician's W-2 employer 401(k); it is a separate, developing area, so confirm current applicability with your CPA or plan administrator rather than relying on this summary alone.

Side-by-side comparison table

Feature	SEP IRA	Solo 401(k)
Who contributes	Employer only (25% of compensation, effectively ~20% of net self-employment earnings)	Employee elective deferral ($24,500 in 2026) plus employer profit-sharing (~20% of net earnings)
2026 overall dollar cap	$72,000 (IRC §415(c))	$72,000 combined (before catch-up); $80,000–$83,250 with age-based catch-up
Contribution room at moderate 1099 income	Lower — scales only with profit	Higher — flat employee deferral is available even at modest net earnings
Roth option	No — traditional (pre-tax) only	Usually yes — Roth employee deferrals, if the plan document allows them
Plan loans	Not permitted	Often permitted, within statutory limits
Counts toward backdoor Roth pro-rata rule	Yes — SEP-IRA balances are pre-tax IRA assets	No — 401(k)-type balances sit outside the IRA pro-rata calculation
Establishment deadline	As late as the tax-filing deadline, including extensions, for the prior year	Generally by December 31 of the plan year for an employee deferral election (confirm any SECURE 2.0 late-adoption nuance with a CPA)
Annual filing	Generally none	Form 5500-EZ once plan assets exceed the IRS filing threshold
Setup complexity	Minimal — model document at most brokerages	Modest — adopt a plan document, typically by year-end

Figures verified against IRS Notice 2025-67 as of July 2026. Specific dollar limits change annually — confirm the current year's numbers on IRS.gov before contributing.

The SEP pro-rata trap that blocks a backdoor Roth

This is the interaction that catches physicians who set up a SEP IRA years ago for simplicity and later start doing a backdoor Roth IRA. Under the IRA pro-rata rule, you cannot treat a Roth conversion as coming only from "the after-tax dollars." Instead, the taxable portion of any conversion is calculated pro-rata across all of your traditional, SEP, and SIMPLE IRA balances combined, valued as of December 31 of the conversion year.

Concretely: with a $40,000 SEP IRA balance from prior locum income and a $7,500 nondeductible contribution to do the backdoor conversion, the IRS looks at the combined $47,500 pool and treats only about 15.8% of any conversion as nontaxable. The other roughly 84% is taxed as ordinary income at your marginal rate — turning a "tax-free" Roth contribution into a real, unplanned tax bill. A solo 401(k) balance has no such problem, since 401(k)-type assets sit outside the IRA pro-rata calculation entirely.

Our backdoor Roth IRA guide for physicians covers the pro-rata rule and its fixes in more depth — including rolling an existing SEP balance into a solo 401(k) before your conversion. If you already do a backdoor Roth, that alone is often reason enough to prefer a solo 401(k) for new 1099 income.

Deadlines: establishment vs. contribution

Physicians frequently conflate two different dates, and the two plans differ on the first one:

• Plan establishment (SEP IRA): as late as your tax-filing deadline, including extensions, for the year you want the contribution to count — what makes a SEP attractive for a retroactive plan on a moonlighting year that already ended.
• Plan establishment (solo 401(k)): generally must be adopted by December 31 of the plan year to make an employee elective deferral for that year. If you only intend an employer profit-sharing contribution for the plan's first year, SECURE 2.0 gives sole proprietors some flexibility to adopt after year-end but before the tax filing deadline — a genuine nuance with real edge cases, so confirm with a CPA.
• Actual contribution deposit (both plans): generally due by your tax-filing deadline, including extensions — typically April 15 of the following year, or October 15 with a filed extension.

The practical takeaway: if you want an employee elective deferral in a solo 401(k) this year, get the plan adopted before December 31. If you're catching up on a prior year and only want the employer-side contribution, a SEP IRA's later establishment deadline is more forgiving — but you give up the employee-deferral advantage going forward.

Worked example: a $60,000 moonlighting year

This is an illustration to show the mechanics, not a projection of your specific numbers. Self-employment tax, entity structure, state tax, and your specific compensation definition all affect the real result — run your own numbers with a CPA.

Assume a physician earns $60,000 in net 1099 moonlighting income for the year, filing as a sole proprietor (Schedule C), under age 50, with no other retirement plan contributions from this self-employment activity.

Step 1 — adjust for self-employment tax. Self-employment tax is calculated on 92.35% of net self-employment earnings, at a combined 15.3% rate (up to the Social Security wage base, plus Medicare on all of it). For $60,000 in net earnings: $60,000 × 92.35% = $55,410 taxable SE earnings; SE tax ≈ $55,410 × 15.3% ≈ $8,478. One-half of SE tax (the deductible portion) ≈ $4,239.

Step 2 — compute the employer profit-sharing contribution. The employer contribution for a sole proprietor is calculated on net self-employment earnings after subtracting one-half of SE tax, using an effective rate of approximately 20% (rather than the headline 25%) to account for the circular compensation definition. Adjusted earnings: $60,000 − $4,239 ≈ $55,761. Employer contribution ≈ $55,761 × 20% ≈ $11,150 (rounded).

Step 3 — compare the two plans on this income:

• SEP IRA: employer contribution only ≈ $11,150. That's the entire SEP contribution for the year.
• Solo 401(k): the same ≈$11,150 employer profit-sharing contribution, plus an employee elective deferral of up to $24,500 (limited to net self-employment earnings after the SE-tax adjustment, so in this example limited to roughly $55,761 minus the employer piece already used — well above the deferral cap, so the full $24,500 employee deferral is available). Total solo 401(k) contribution ≈ $35,650 ($11,150 employer + $24,500 employee), still comfortably under the $72,000 overall 2026 cap.

On $60,000 of 1099 moonlighting income, the solo 401(k) shelters roughly $24,500 more than the SEP IRA in this illustration — entirely from the employee deferral layer the SEP doesn't offer. That gap is the concrete version of the "flat dollar amount vs. percentage of profit" mechanic described above, and it's largest at exactly this kind of moderate, part-time 1099 income level.

A decision framework

Strip away the marketing and the choice comes down to a short list of honest questions:

1. Do you want to maximize contribution room on moderate 1099 income? The solo 401(k) almost always shelters more, because of the flat employee deferral layer. This is the default answer for most moonlighting, locum, and side-income physicians.
2. Do you do — or plan to do — a backdoor Roth IRA? If yes, strongly prefer the solo 401(k). A funded SEP IRA balance will complicate or largely defeat a backdoor Roth via the pro-rata rule.
3. Do you value Roth deferrals or the ability to borrow from the plan? Only the solo 401(k) offers either.
4. Is absolute simplicity worth giving up contribution room? If your 1099 income is small and occasional, you don't do a backdoor Roth, and you want zero ongoing paperwork, a SEP IRA's no-filing simplicity and later establishment deadline can be a reasonable trade — especially for a retroactive prior-year setup.
5. Will you ever hire a non-spouse employee? Both plans change materially once you have eligible W-2 staff. If a group practice or hiring plan is on the horizon, model that with a CPA before adopting either plan.

For most physicians with moonlighting, locum, or expert-witness 1099 income, the framework resolves to: open a solo 401(k) unless you specifically need a SEP IRA's after-year-end setup window and don't do a backdoor Roth. As income and complexity grow — especially for solo-practice owners in their 40s and 50s — the next layer to evaluate is a cash balance plan stacked on top, a separate and more advanced decision.

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