Solo 401(k) vs. SEP-IRA for Physicians With 1099 Side Income

You take a W-2 job for the bulk of your income, and then you pick up locum shifts, read studies on the side, sit on an advisory board, or moonlight a few weekends a month. That extra work shows up as 1099 income, and somewhere in your first or second year of doing it, a question surfaces: what do you do with the retirement-savings room that self-employment income opens up? Two account types come up again and again in that conversation, the solo 401(k) and the SEP-IRA. They look similar from across the room. Up close, they behave very differently, and one of those differences can raise your tax bill in ways that are easy to miss if you also run a backdoor Roth IRA.

This is a piece of retirement planning for doctors that sits right at the seam between your employment, your side income, and your taxes. None of those things lives in its own box. The point here is to describe how each account works, where they diverge, and which trade-offs you and your advisor tend to weigh, so the conversation you eventually have with a CFP® professional or your CPA starts from solid ground rather than a sales pitch.

What 1099 Income Actually Unlocks

Your W-2 job almost certainly comes with a 401(k) or 403(b). You contribute to it through payroll, and your employer may add a match. That plan is tied to that job. Your 1099 work is a separate business in the eyes of the IRS, even if the only employee is you, and that separate business can have its own retirement plan on top of the W-2 plan you already use.

There is one number that ties the whole picture together: the employee deferral limit follows you, not your jobs. For 2026, the elective deferral limit is $24,500 across all 401(k) and 403(b) plans you participate in, according to the IRS announcement of 2026 retirement plan limits. If you already max your W-2 plan deferral, you have generally used up your personal deferral for the year. That single fact shapes almost everything about how a solo 401(k) and a SEP-IRA compare for a physician who moonlights, and it is the detail most people miss when they assume the side plan simply stacks a fresh full limit on top.

This is also the moment where the W-2 plus 1099 hybrid planning playbook matters most, because the right move depends on what your main-job plan already lets you do.

How the SEP-IRA Works

A SEP-IRA (Simplified Employee Pension) is the lighter-weight of the two. You open it at a custodian, and the business funds it with employer contributions only. There is no employee deferral piece. The contribution is a percentage of your net self-employment earnings, and for a self-employed person that works out to roughly 20% of net earnings after the deduction for half of self-employment tax, up to the overall limit. The IRS describes the calculation and the worksheet in Publication 560, Retirement Plans for Small Business.

The appeal is simplicity. A SEP-IRA can usually be opened and funded up to your tax filing deadline, including extensions, which is friendly to income that you cannot predict until the year is nearly over. There is no separate annual government filing for a one-person SEP, and the paperwork to set one up is short. For a physician whose side income is occasional and modest, that ease is a real feature.

There is a catch that has nothing to do with the SEP itself and everything to do with the rest of your retirement picture: a SEP-IRA is, for tax purposes, a traditional IRA. That single classification is where the backdoor Roth problem comes from, and we will come back to it.

How the Solo 401(k) Works

A solo 401(k), which the IRS calls a one-participant 401(k), is a 401(k) plan for a business with no employees other than the owner and a spouse. It has two contribution buckets. The first is your employee deferral, the same deferral bucket described earlier, capped at $24,500 for 2026 across all your 401(k)-type plans combined. The second is an employer contribution from the business, again roughly 20% of net self-employment earnings. The IRS overview of one-participant 401(k) plans lays out both buckets.

Here is the wrinkle if you moonlight. If your W-2 job already absorbs your full employee deferral, the employee bucket in your solo 401(k) is effectively spoken for. What remains available is the employer contribution bucket. In that common scenario, the maximum you can put into a solo 401(k) from your side income and the maximum you could put into a SEP-IRA from the same income land in a similar place, because both are driven by the same roughly 20% employer math.

The solo 401(k) tends to pull ahead when your W-2 plan has not used up your deferral, for example if your main job offers no plan, or when you want a Roth bucket, a loan feature, or clean interaction with a backdoor Roth. It also carries more setup and upkeep. Once the plan's assets cross a threshold the IRS sets, a one-participant 401(k) generally has to file an annual Form 5500-EZ. The plan document is more involved than a SEP, and providers vary widely in what features they actually support.

The Side-by-Side Comparison

It helps to see the two plans on the same grid. The table below lays out the factors that come up most often when you weigh the choice with your advisor. Treat it as a map of the trade-offs, not a verdict, because the right answer depends on your specific income, your W-2 plan, and whether you run a backdoor Roth.

The Pro-Rata Rule: Where a SEP-IRA Can Cost You

This is the part of the decision that catches the most physicians off guard. Many attendings earn above the income limit for contributing to a Roth IRA directly, so they use the backdoor Roth: a nondeductible contribution to a traditional IRA, followed by a conversion of that contribution to a Roth IRA. When there is no other pre-tax money sitting in any traditional IRA, that conversion is tax-free if performed properly, because the dollars going in were already after-tax.

The complication is a rule the IRS applies across all of your traditional IRAs at once. For the purpose of figuring how much of a conversion is taxable, the IRS treats every traditional IRA you own as one combined pool. As the IRS instructions for Form 8606 describe, the calculation divides your after-tax basis by the total value of all those IRAs, and the resulting fraction determines how much of any conversion escapes tax. The official definition of a traditional IRA includes traditional SEP IRAs. So a SEP-IRA balance gets pulled into that pool.

Here is what that means in plain terms. Suppose you contribute $7,000 of after-tax money for a backdoor Roth, but you also hold $63,000 in a SEP-IRA from your moonlighting income. Your total traditional IRA balance is $70,000, and only $7,000 of it is after-tax basis. That makes only one-tenth of any conversion tax-free. The other nine-tenths is treated as taxable income, even though you only meant to convert the fresh $7,000. The backdoor Roth you expected to be nearly tax-free instead generates a real tax bill at your marginal rate.

A solo 401(k) generally avoids this, because money in a 401(k) is not a traditional IRA and does not enter the IRA pro-rata pool. That is the single largest reason physicians who run a backdoor Roth tend to look hard at a solo 401(k) before defaulting to a SEP. The trade-offs that come up in this decision include the SEP's simplicity on one side and the pro-rata exposure on the other, and the weight you place on each depends on whether the backdoor Roth is part of your plan at all. If it is not, the pro-rata point may not apply to you. This interaction is covered in more depth in our piece on backdoor Roth pitfalls and the pro-rata rule.

How the Contribution Math Tends to Play Out

For a physician who already maxes the employee deferral at the W-2 job, the headline contribution numbers for the two plans often land close together, because both rely on the same employer-side calculation. The IRS worksheet for self-employed people in Publication 560 walks through how net earnings get reduced by half of self-employment tax and by the contribution itself before the percentage is applied. The practical upshot is that the dollars you can put away from a given amount of side income are similar under either plan in that situation.

Where the solo 401(k) can put more money to work is when your deferral room is not already used. If your primary job has no retirement plan, or if your entire household income runs through 1099 work, you may be able to add the employee deferral on top of the employer contribution. That stacking is what lets a solo 401(k) reach a higher total than a SEP from the same income, and it is why the plans are not interchangeable even though their employer math matches.

Compensation that counts toward these contributions is capped each year, and the catch-up rules for those age 50 and older add another layer. Because these limits change annually and the self-employed calculation is somewhat complex, this is a place where running your actual numbers with a tax professional earns its keep. The general structure is stable; the specific figure for your household is not something to eyeball.

Timing, Flexibility, and Real Life

Side income is rarely steady. Some years you pick up a dozen locum weekends; some years you barely moonlight at all. The two plans treat that unpredictability differently. A SEP-IRA can typically be both opened and funded after the year ends, up to your filing deadline including extensions, which lets you decide how much to contribute once you actually know your numbers. That backward-looking flexibility fits irregular income well.

A solo 401(k) usually needs to exist before the calendar year closes for the employee deferral portion, even if the funding happens later. The plan has to be in place, and the deferral generally has to be elected, on a tighter timeline. If you are weighing a solo 401(k), the setup conversation often needs to happen earlier in the year than people expect. This is one of those details where waiting until tax season can close a door that was open in the fall.

A Note on the Entity Question

Physicians with growing 1099 income sometimes ask whether they should form an S-corp or another entity around the side work, partly for retirement-plan reasons. That decision reaches well beyond retirement accounts into payroll, self-employment tax, and administrative cost, and it interacts with the plan choice in ways that are specific to each household. It is not a one-size-fits-all move, and it tends to surface as a real question only once the side income reaches a certain scale. Our discussion of the S-corp versus sole proprietor trade-offs for locum physicians walks through what that looks like.

The retirement-plan decision and the entity decision are connected, but they are not the same decision, and tackling them in the wrong order can lead to choices you later have to unwind. This is firmly in the territory where tax strategies for doctors and retirement planning have to be coordinated rather than handled in isolation.

How Physicians Typically Navigate the Choice

When physician families work through this with their advisor, a few themes show up consistently. The first question is usually whether a backdoor Roth is part of the plan, because that single fact often steers the decision toward the solo 401(k) to keep the IRA pro-rata pool clean. The second is how predictable the side income is, because a SEP-IRA's after-the-fact funding suits unpredictable years. The third is whether anyone wants a Roth bucket or a loan feature inside the plan, which only the solo 401(k) tends to offer.

It is also common for physicians to already hold a SEP-IRA from earlier side work and only later discover the pro-rata conflict when they start a backdoor Roth. There are approaches for addressing an existing pre-tax IRA balance, and they each carry their own tax consequences, which is exactly the kind of thing to review with a CPA before acting rather than after. The order of these moves matters, and the cost of getting the order wrong is your tax dollars.

None of this is meant to crown a winner. A SEP-IRA is a clean, simple tool that fits some physician households, especially those without a backdoor Roth in the picture. A solo 401(k) carries more features and more upkeep, and it tends to fit physicians who want the Roth flexibility or who need to protect a backdoor Roth strategy. The work is matching the tool to your actual situation, in the right order, alongside your taxes and your main-job plan.

Where to Go From Here

If you are picking up 1099 income on top of a W-2 job, the choice between a solo 401(k) and a SEP-IRA is worth getting right the first time, because some of these decisions are awkward to reverse and the pro-rata interaction can be expensive to discover late. For twenty-five years, our work has been with physician families, which means we have sat through this exact decision many times across moonlighting attendings, locum physicians, and dual-physician households.

If you would like help thinking through which plan fits your household, how it interacts with your backdoor Roth, and what order to do things in, the team is glad to talk it through. You can start a conversation at physicianfamily.com/start or reach us at contact@physicianfamily.com. There is nothing to buy and no product to push, just a conversation about whether we are the right fit to help your family make these decisions with clarity.

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