Solo 401(k) vs SEP-IRA vs Defined Benefit Plans: Which Retirement Setup Wins for Physician S Corps

In a Nutshell

• If you’re a physician running an S corp with both W-2 hospital income and 1099 side work, your retirement plan choice can shift your tax bill by tens of thousands of dollars a year.
• A Solo 401(k) usually beats a SEP-IRA for physician S corps because it lets you contribute more on a smaller W-2 salary and opens the door to Roth and after-tax dollars.
• A Defined Benefit (DB) plan layered on top is where high-earning docs (think $500K+) really pull ahead. Six-figure deductions are normal here.
• The catch with S corp retirement plans: your contributions are based on your W-2 wages, not your distributions. Set the W-2 wrong and you leave money on the table.
• This is one piece of a bigger physician tax planning picture. Used right, it pairs with home office deductions, PTE elections, family employment, and more.

---

You’re an ER doc. You’re working W-2 shifts at the hospital pulling in $400,000. On the side, you’re picking up locums work, expert witness gigs, telehealth, maybe some moonlighting, and that 1099 income is another $100,000.

So you’re at $500,000 total. Good year. Now your CPA, or maybe your buddy in the doctor’s lounge, mentions retirement plans. You’ve heard of the SEP-IRA. You’ve heard of the Solo 401(k). Someone at a conference mentioned a “defined benefit plan” and your eyes glazed over.

Which one actually wins?

Short answer: it depends on what your S corp looks like, how much W-2 you pay yourself, and how aggressive you want to get with deductions. The longer answer is what we’re going to walk through.

Why Your S Corp Setup Changes Everything

Before we even compare the three plans, let’s talk about why being an S corp matters here. Because it does. A lot.

When you operate your 1099 income through an S corporation, you split your money into two buckets:

• W-2 wages you pay yourself (subject to payroll taxes)
• Distributions from the company (not subject to payroll taxes)

That split is good for saving on Social Security and Medicare taxes. But there’s a wrinkle most docs miss.

Your retirement plan contributions are based on your W-2 wages, not your total income.

Pay yourself a $50,000 W-2 and take $200,000 in distributions? Your retirement contribution room is calculated off that $50,000. Set the W-2 too low and you’ve kneecapped your retirement plan before it even started.

This is one of the most common mistakes we see in physician tax planning. The doc tries to minimize payroll tax by setting an absurdly low W-2, then realizes their Solo 401(k) employer contribution is tiny because of it.

A reasonable compensation study can help you find the floor that the IRS will accept while still letting you contribute meaningfully. For most physicians we work with, somewhere around 50% of net income is a defensible W-2 number, give or take based on specialty, hours, and the type of work.

That’s the foundation. Now let’s compare the three options.

SEP-IRA: Simple, but Probably Not the Winner

A SEP-IRA is the easiest retirement plan to set up. You can open one at almost any custodian in an afternoon. No annual filings. No TPA. Cheap.

For 2025, you can contribute up to 25% of your W-2 wages, capped at $70,000.

Sounds great. Here’s the problem.

The 25% limit applies only to the employer side. There’s no employee deferral. So if your W-2 from your S corp is $100,000, your max SEP contribution is $25,000. Done. That’s it.

For our ER doc with $100,000 in 1099 income flowing through her S corp, paying herself maybe $50,000 to $60,000 in W-2 wages, the SEP-IRA caps her at $12,500 to $15,000. Not bad, but not great.

A few other downsides worth knowing:

• No Roth option in a traditional SEP-IRA at most custodians. You’re locked into pre-tax.
• No loans. If life happens, you can’t borrow against it.
• Backdoor Roth gets messy. SEP-IRA balances trigger the pro-rata rule on backdoor Roth conversions. A lot of high earners get burned by this and don’t realize it until tax time.

The SEP-IRA is fine if you want zero administrative work and you have very low S corp income. For our $500,000 ER doc, it’s almost always the wrong choice.

Solo 401(k): The Default Winner for Most Physician S Corps

The Solo 401(k) is what most physician tax advisors recommend as the starting point. Here’s why.

For 2025, you get two contribution buckets:

1. Employee deferral: up to $23,500 (or $31,000 if you’re 50+)
2. Employer profit sharing: up to 25% of W-2 wages

Combined cap: $70,000 (or $77,500 if 50+).

Same total cap as the SEP-IRA. But look at how you get there.

With the Solo 401(k), the $23,500 employee deferral is not tied to your W-2 percentage. You can defer the full amount even on a modest W-2, and then layer the 25% employer piece on top.

Let’s run our ER doc through this:

• 1099 income: $100,000
• Reasonable comp W-2 from S corp: $60,000
• Distribution: about $40,000 (after expenses)

SEP-IRA contribution: 25% of $60,000 = $15,000 Solo 401(k) contribution: $23,500 employee + $15,000 employer = $38,500

Same income. Same W-2. The Solo 401(k) gets her $23,500 more into a retirement account.

A few other things the Solo 401(k) does better:

• Roth option. Many Solo 401(k) plans now allow Roth deferrals on the employee side. Some custom plans even allow after-tax contributions and mega backdoor Roth conversions, which is a whole separate post.
• Loan provision. You can borrow up to $50,000 if your plan document allows it.
• No pro-rata mess. Solo 401(k) balances don’t interfere with backdoor Roth conversions.
• Coordinates with your hospital W-2 plan. Your $400K W-2 hospital job probably already maxes a 403(b) or 401(k). The employee deferral limit is shared across both, but the employer side is per-plan, so you can still get the full profit-sharing piece from your S corp.

The downsides? You’ll need a real plan document, you’ll have to file Form 5500-EZ once your balance hits $250,000, and you actually have to fund the plan by your tax filing deadline.

For 90% of the physician S corps we look at, the Solo 401(k) wins over the SEP-IRA. The math just isn’t close.

Defined Benefit Plans: Where High-Earning Physicians Pull Away

Here’s where things get interesting.

A defined benefit plan, sometimes called a cash balance plan when designed in a more modern way, lets you contribute way more than the $70,000 limit on a Solo 401(k).

We’re talking $100,000, $200,000, sometimes $300,000+ per year in deductible contributions, depending on your age, income, and plan design.

How? Instead of contribution-based, a DB plan is benefit-based. An actuary calculates how much you need to put in today to fund a specific retirement benefit tomorrow. The older you are and the higher your W-2, the more they can stuff in there.

For our ER doc making $500K total with $100K through her S corp, a DB plan layered on top of a Solo 401(k) might look like this:

• Solo 401(k) employee + employer: ~$38,500
• Defined Benefit contribution: $80,000 to $150,000 (depending on age and design)
• Total deductible retirement contribution: $120,000 to $190,000

At a 37% federal bracket plus California or New York state tax, that’s potentially $50,000 to $80,000 in tax savings in a single year.

This is one of the most underused strategies in physician tax planning. We see docs making $700,000, $800,000, $1 million a year who’ve never heard of it from their CPA.

But there are real tradeoffs.

What you actually sign up for with a DB plan

• Funding commitment. A DB plan requires you to contribute roughly the same amount each year for at least three to five years. The IRS doesn’t love seeing plans that get funded big in year one and then frozen. If you have a bad income year, this can squeeze.
• Actuarial cost. You need a TPA and an actuary. Budget $2,500 to $5,000 a year in plan administration. Worth it when contributions are six figures, painful when they aren’t.
• Form 5500 filing. Required annually.
• W-2 still matters. The contribution is based on your W-2 wages. Set your W-2 too low and the actuary can’t justify large contributions. This is the part most physicians get wrong on the first try.

When a DB plan stops making sense

• If your 1099 income is sporadic or unpredictable.
• If you’re under 35 and your contribution math doesn’t work yet.
• If you can’t comfortably set a W-2 high enough to support the contribution.

For high-earning physicians in their 40s, 50s, and 60s with steady 1099 income, the math is often fantastic. For everyone else, run the numbers carefully before committing.

A brief note on stacking: the most aggressive setup combines a Defined Benefit plan with a Solo 401(k) plus profit sharing. This combo is what gets you to those $200K+ deduction numbers. The plans coordinate, but the design has to be done by someone who knows what they’re doing. Not a DIY job.

A Real-World Picture: The ER Doc Making $500K

Let’s pull this all together with our ER doc, age 48, $400K W-2 from the hospital, $100K 1099 from locums and telehealth.

Bad setup:

• Pay herself $30K W-2 from S corp to “minimize taxes”
• Open a SEP-IRA
• Contribute $7,500 (25% of $30,000)
• Tax savings on the contribution at 37% + state: roughly $3,200

Better setup:

• Reasonable comp study lands W-2 at $60K
• Open a Solo 401(k)
• Contribute $23,500 (employee) + $15,000 (employer) = $38,500
• Tax savings: roughly $16,500

Best setup:

• Reasonable comp study, W-2 at $60K to $75K
• Solo 401(k) maxed at $38,500 to $42,250
• Defined Benefit plan layered on, contributing roughly $90,000 (varies with actuarial design)
• Total deductible contribution: roughly $130,000+
• Tax savings: roughly $55,000+

That’s the spread. Same income, same physician, three very different outcomes depending on how the plan is structured.

And honestly, this is just the retirement piece. For our high-earning physician clients, retirement plans are usually one part of a larger physician tax strategy that might include things like a 14-day home rental, a home office reimbursement, employing children up to their standard deduction, electing Pass Through Entity tax in states like California so the state tax becomes a 100% deductible business expense, and depending on the situation, more advanced tools like SEBA Plans, Restricted Property Trusts, captive insurance through an Individual Roth 401(k), or tax-advantaged energy and mineral interest investments.

The retirement plan choice is foundational. The rest builds on top.

Common Mistakes We See

A few patterns that come up over and over with physician S corps:

• Maxing a SEP when a Solo 401(k) would have been better. Almost always a mistake unless you’re brand new and just want simplicity.
• Setting W-2 too low. Saves payroll tax, costs retirement contribution room, and creates IRS audit exposure. Run a reasonable comp study.
• Ignoring DB plans because “they sound complicated.” They are more complex, yes. The deduction math often pays for the complexity ten times over.
• Funding a DB plan in a bad year and having to keep funding it. Make sure your income is stable enough first.
• Pro-rata trap from old SEP-IRA balances. If you want to do backdoor Roth conversions cleanly, roll old SEPs into your Solo 401(k) first.
• Not coordinating the hospital W-2 plan with the S corp plan. The employee deferral cap is across all plans, not per plan. The employer side is per plan.

None of these are exotic. They’re the everyday mistakes that show up in tax returns we review.

FAQ

Can I have a Solo 401(k) and a 401(k) at my hospital W-2 job? Yes. The employee deferral limit ($23,500 in 2025) is shared across all plans. So if you’re already maxing the hospital plan, you can’t double-dip the deferral. But you can still take the employer profit-sharing contribution from your S corp Solo 401(k), which is per-plan.

Do I need an LLC or can my S corp sponsor the plan directly? Your S corp can sponsor the plan directly. No LLC needed. The plan belongs to the business that’s paying you W-2 wages.

What if my 1099 income is unpredictable? Stick with a Solo 401(k). The funding flexibility matters more than the bigger DB contribution. You can always add a DB plan later when your income stabilizes.

Is a SEP-IRA ever the right answer? Sometimes. If your S corp has truly minimal income, you don’t want any administrative work, and you don’t care about Roth or backdoor Roth, the SEP can work. It’s just rare for higher-earning physicians.

How does the Pass Through Entity election fit in? The PTE election lets your S corp pay your state income tax attributable to the business at the entity level, making it a 100% deductible business expense. This isn’t a retirement plan, but it pairs really well with one. We treat it as part of the same physician tax planning conversation.

What about a Backdoor Roth on top of all this? Absolutely. The Solo 401(k) doesn’t trigger pro-rata, so you can do a backdoor Roth on the side cleanly. Just don’t have a SEP-IRA balance sitting around or you’ll have a problem.

When should I add a Defined Benefit plan? Generally when your 1099 or S corp net income is consistent and you’re already maxing the Solo 401(k). The math typically works best for physicians 40+ with stable high income and a long enough horizon to fund the plan for several years.

---

Picking the right retirement plan is one of the highest-leverage decisions a physician S corp owner can make. The wrong setup can cost you tens of thousands of dollars in deductions every single year. The right one, paired with a broader physician tax strategy, can shift your effective tax rate in ways most docs don’t realize is even legal.

If you’re earning $500K+ and operating an S corp, this isn’t a topic to leave to the default settings on TurboTax. A physician tax advisor who actually understands S corp mechanics, reasonable compensation, and plan design can save you more in one year than they’ll cost you over a decade.

Want to see what your numbers look like? Talk to a physician tax strategist who can model the SEP vs Solo 401(k) vs DB plan question for your specific income, age, and entity setup. The difference between a generic answer and a tailored one is usually six figures over the life of your practice.