SEP vs SIMPLE With 1 Employee: $73.5K vs $17.5K Math

The decision in one example

Maria runs a two-person marketing studio in Austin, Texas, taxed as an S-corp. She pays herself $150,000 in W-2 wages and her one full-time designer, Devon, $50,000. She files single. She wants to put serious money into a retirement account and is choosing between a SEP-IRA and a SIMPLE IRA. Texas has no state income tax, so the entire decision is about federal tax and mandatory employee cost.

Here is the trap. The SEP lets Maria shelter far more — up to $37,500 (25% of her $150,000) and theoretically up to the $73,500 cap if her wages were higher. But IRC §408(k)(3) forces her to give Devon the same percentage. To put 25% into her own SEP, she must put 25% of Devon’s $50,000 — $12,500 — into his. The SIMPLE caps Maria at $17,500 of deferral but only obligates a 3% match on Devon: $1,500. The mandatory employee cost is $12,500 versus $1,500. That $11,000 gap is the whole ballgame.

Maria does not need to shelter the full SEP maximum — she wants to put away about $20,000. So the SIMPLE wins decisively: she defers $17,500, receives a 3% match on her own pay, and her total employee cost is a fraction of the SEP’s. The SEP only pulls ahead if she genuinely wants to max out the $37,500+ shelter and is willing to pay the matching $12,500 for Devon.

The two rules that drive every dollar

SEP-IRA: one percentage for everyone (IRC §408(k))

A SEP is employer-funded only — there is no employee salary deferral. The employer picks a percentage (up to 25% of compensation) and applies it uniformly to every eligible employee, the owner included. For 2026 the maximum SEP contribution per person is $73,500, and the compensation that can be counted toward the 25% calculation is capped at the IRC §401(a)(17) limit of $360,000 for 2026 (25% × $360,000 = $90,000, but the lower per-person dollar cap of $73,500 controls). The owner cannot contribute for themselves and skip staff — the uniform-percentage rule under §408(k)(3) is the entire point of the design.

One quirk worth knowing: for a self-employed owner (Schedule C, not an S-corp), the “25% of compensation” is really 20% of net self-employment income after the deduction for half of SE tax, because the contribution itself reduces the base. For S-corp owners like Maria, it is a clean 25% of W-2 wages — which is one reason the wage figure you set matters so much.

SIMPLE IRA: capped deferral plus a small match (IRC §408(p))

A SIMPLE is mostly employee-funded. Each participant defers up to $17,500 for 2026, with a $3,500 catch-up at age 50+ (or a $5,250 super catch-up at ages 60–63 under SECURE 2.0 §109). The employer’s only obligation is one of two formulas under §408(p)(2):

• 3% dollar-for-dollar match — matches each deferring employee up to 3% of their pay. Can be reduced to as low as 1% in 2 out of any 5 years. Only employees who defer get a match.
• 2% nonelective — 2% of compensation to every eligible employee, whether or not they defer.

That capped match is why the SIMPLE is the low-cost option once you have staff: your downside on each employee is bounded at 3% (or 2%) of their pay, not whatever percentage you choose for yourself.

Side-by-side: the numbers that decide it

Maria’s full math, both ways

Maria’s S-corp wages: $150,000. Devon’s wages: $50,000. Maria is 45 (no catch-up). Here is what each plan costs and shelters.

Note the SIMPLE owner line: a 3% match on Maria’s own $150,000 wage is $4,500, so her personal total is $22,000 — only $15,500 below the SEP’s $37,500. To capture that extra $15,500 of shelter, the SEP forces her to spend an extra $11,000 funding Devon. The efficiency metric — owner dollars sheltered per dollar of employee cost — is $14.67 under the SIMPLE versus $3.00 under the SEP. Unless Maria desperately needs the headroom above $22,000, the SIMPLE keeps roughly $11,000 of cash she would otherwise hand to an employee’s account.

The federal tax angle reinforces it. Maria’s marginal rate sits in the 24% bracket (single: $103,351–$197,300 for 2026). The SEP shelters $15,500 more of owner income, worth $3,720 in federal tax deferral. But she pays an extra $11,000 to fund Devon — deductible to the S-corp at the same 24%, so the after-tax cost of that extra employee funding is about $8,360. She would spend $8,360 to defer tax on $15,500. That is a poor trade unless she values the additional tax-deferred compounding very highly.

The breakeven: when the SEP actually wins

The SEP pulls ahead in two situations, and they share a theme — the employee mandate is small relative to the owner’s shelter:

1. Employee pay is a small fraction of total payroll. If Devon earned $20,000 part-time instead of $50,000, the SEP’s 25% mandate would cost only $5,000 — and Maria’s $37,500 shelter starts looking cheap. The SEP wins when staff comp is roughly under 25–30% of total covered payroll.
2. The owner truly wants to max the cap. A high-earning owner who wants the full $73,500 simply cannot get there in a SIMPLE, where the realistic owner total tops out around $21,000–$26,000 with the match. If the goal is maximum shelter and the employee bill is tolerable, the SEP is the only IRA-based vehicle that reaches the top.

Below that line — an owner who wants to shelter under about $30,000 and has an employee earning a meaningful salary — the SIMPLE wins on cost almost every time.

What most people miss: the Solo 401(k) is off the table now

Plenty of one-person businesses default to a Solo 401(k) — and rightly so before they hire, because it beats both a SEP and a SIMPLE on owner shelter ($24,500 employee deferral plus a 25% employer contribution, up to the $72,000 §415(c) total for 2026). But the Solo 401(k) is restricted to owners and their spouses with no eligible common-law employees. The day a non-spouse employee crosses 1,000 hours in a year, the Solo 401(k) is no longer permitted: it must become a regular 401(k) with full nondiscrimination testing, or you move to a SEP or SIMPLE.

The myth is that hiring “just one part-timer” is harmless to your plan. It is not — once that part-timer is eligible, the Solo 401(k) is gone, and you are back to choosing between the SEP’s equal-percentage mandate and the SIMPLE’s capped match. A spouse on payroll, importantly, does not break Solo 401(k) eligibility, which is why owner-spouse businesses keep the richest option.

A second misconception: people assume the SEP is “cheaper to run” because it has no employee deferrals to administer. The administrative simplicity is real, but it is dwarfed by the contribution economics once you have staff. Simplicity does not offset an $11,000 mandatory employee contribution.

Setup timing and the rules that trip people up

• SIMPLE has an October 1 deadline. A SIMPLE IRA must be established by October 1 of the plan year (or, for a brand-new business started after October 1, as soon as administratively feasible). Miss it and you wait until next year.
• SEP can be set up after year-end. A SEP can be established and funded up to your tax-filing deadline including extensions — a meaningful advantage if you are deciding in March for the prior year.
• SIMPLE has a 2-year withdrawal trap. Distributions from a SIMPLE within the first 2 years of participation hit a 25% early-withdrawal penalty (versus the usual 10%), and rollovers in that window are restricted. Account for this if liquidity matters.
• Eligibility rules differ. A SEP can require up to 3 of the last 5 years of service before an employee must be covered; a SIMPLE generally covers employees earning $5,000 in any 2 prior years and expected to earn $5,000 this year. The SEP’s longer service requirement can legitimately delay covering a brand-new hire.

The decision lever

Pick your annual shelter target first, then let it choose the plan. If you want to shelter under roughly $25,000–$30,000 and you employ someone earning a real salary, the SIMPLE IRA wins — your employee cost is bounded at a 3% match instead of whatever percentage you choose for yourself. If you want to push toward the $73,500 SEP cap and your staff payroll is a small slice of the total, the SEP is the only IRA-based plan that gets you there, and the equal-percentage employee cost may be worth it. For Maria, wanting about $20,000 of shelter with a $50,000 employee, the SIMPLE saves her roughly $11,000 in cash this year — and that is the number that should drive the choice, not the headline $73,500 cap she was never going to use.