SEP-IRA Guide 2026: $70,000 Contribution Limit, Self-Employed Calculation & Setup
The SEP-IRA (Simplified Employee Pension IRA) is the most accessible high-contribution retirement account for self-employed individuals and small business owners. In 2025, contributions can reach $70,000 — nearly 10× the standard IRA limit — with a setup deadline as late as October 15 of the following year for extension filers. This guide covers the exact contribution formula, employee inclusion requirements, the SEP vs. Solo 401(k) decision, and how to set up a SEP-IRA before your next tax return.
Key Takeaways
- ▸2025 SEP-IRA limit: $70,000 or 25% of W-2 compensation, whichever is lower. Self-employed: effectively ~20% of net profit.
- ▸No employee salary deferrals — all contributions made by employer only. All contributions are immediately 100% vested.
- ▸If you have employees, you must contribute the same percentage of compensation to eligible employees' SEP-IRAs as you contribute to your own.
- ▸Setup and contribution deadline: business tax return due date including extensions (up to October 15 for sole proprietors).
- ▸No annual IRS filing requirement (no Form 5500) for most SEP-IRAs — minimal administrative burden.
- ▸SEP-IRA counts as a workplace plan for Traditional IRA deductibility phase-out purposes.
- ▸Solo 401(k) generally wins over SEP-IRA for solo self-employed earning below ~$285,000 — elective deferral component enables higher contributions at lower incomes.
- ▸SEP-IRA funds follow Traditional IRA rules: RMDs begin at age 73, distributions taxed as ordinary income, 10% penalty before 59½ with same exceptions.
1. What Is a SEP-IRA?
A Simplified Employee Pension IRA (SEP-IRA) is an employer-funded retirement plan governed by Internal Revenue Code Section 408(k). Despite the word "pension," it is not a traditional defined benefit pension — it is an employer-funded individual retirement account with tax-deductible contributions and tax-deferred growth. The "simplified" in the name reflects the minimal administrative burden compared to 401(k) plans: no annual IRS Form 5500 filing requirement, no non-discrimination testing, and establishment via a single IRS prototype document (Form 5305-SEP).
SEP-IRAs were created by the Revenue Act of 1978 to encourage retirement savings among small business owners and self-employed individuals who lacked access to corporate 401(k) plans. Today, they are used by freelancers, consultants, doctors, attorneys, real estate agents, and any individual with self-employment income.
SEP-IRA at a Glance (2025)
2. 2025–2026 Contribution Limits
| Year | Max Contribution | % of Compensation | Compensation Cap |
|---|---|---|---|
| 2020 | $57,000 | 25% | $285,000 |
| 2021 | $58,000 | 25% | $290,000 |
| 2022 | $61,000 | 25% | $305,000 |
| 2023 | $66,000 | 25% | $330,000 |
| 2024 | $69,000 | 25% | $345,000 |
| 2025 | $70,000 | 25% | $350,000 |
| 2026 (proj.) | $71,000 | 25% | $355,000 |
Source: IRS Revenue Procedure 2024-40. 2026 projected — confirm after IRS October 2025 announcement.
3. Self-Employed Contribution Calculation
The self-employed SEP contribution calculation is more complex than for W-2 employees because you cannot take 25% of your gross Schedule C income directly. The SEP contribution reduces self-employment net income, creating a circular dependency that requires the IRS deduction worksheet.
The Correct Formula
Step 1: Net Profit (Schedule C)
Step 2: − SE Tax Deduction (50% of SE tax from Schedule SE)
Step 3: × 20% (= 25% ÷ 1.25 — the circular adjustment)
= Maximum SEP-IRA Contribution
| Net Self-Employment Profit | SE Tax Deduction* | Net Adjusted | Max SEP Contribution (×20%) |
|---|---|---|---|
| $25,000 | $1,766 | $23,234 | $4,647 |
| $50,000 | $3,533 | $46,467 | $9,293 |
| $100,000 | $7,065 | $92,935 | $18,587 |
| $200,000 | $14,130 | $185,870 | $37,174 |
| $350,000+ | Capped | Capped at $350K comp | $70,000 (max) |
*Approximate SE tax deduction. Use IRS Publication 560 Worksheet 1 or Schedule SE for exact figures. Source: IRS Publication 560.
4. Eligibility: Who Qualifies as an Employee
For employers with employees, the IRS sets minimum eligibility standards for employee participation in the SEP plan. Employees must be included if they meet all three criteria:
Minimum Age
Employee must be at least 21 years old
Service Requirement
Worked in at least 3 of the last 5 years
Minimum Compensation
Received at least $750 in 2025 (indexed)
Employers can use more generous eligibility criteria — for example, including all employees immediately, or eliminating the service requirement. They cannot use more restrictive criteria. Union employees covered by collective bargaining agreements and nonresident aliens with no U.S. source income can be excluded.
Exclusions Are Limited
Part-time employees, seasonal workers, and lower-paid employees generally cannot be excluded from a SEP if they meet the three minimum criteria. This is why many growing businesses switch from SEP-IRA to a 401(k) plan as they hire — 401(k) plans allow more flexible eligibility rules, vesting schedules, and employee match structures.
5. The Mandatory Same-Percentage Rule for Employees
The most significant cost consideration for business owners with employees: SEP-IRA contributions must be made for all eligible employees at the same percentage of compensation as the owner contributes for themselves. This is not a dollar-matching requirement — it is a percentage uniformity requirement.
Example: 25% Contribution Rate with Employees
| Person | W-2 Compensation | SEP Contribution (25%) |
|---|---|---|
| Owner (S-corp W-2) | $200,000 | $50,000 |
| Employee 1 | $80,000 | $20,000 |
| Employee 2 | $55,000 | $13,750 |
| Employee 3 | $40,000 | $10,000 |
| Total employer cost | $375,000 | $93,750 |
The employer in this example contributes $50,000 for themselves but must also fund $43,750 for employees — total cost of $93,750. Many business owners with growing payrolls reduce their SEP contribution percentage voluntarily (to 10% or 15%) to manage employee contribution costs. There is no obligation to contribute the maximum — any percentage from 0% to 25% is permitted in any given year. Contributions are also entirely discretionary year-to-year; you can skip contributions entirely in a low-income year.
6. How to Set Up a SEP-IRA: Step by Step
Choose a Financial Institution (Custodian)
Open the SEP-IRA at any IRA custodian: Fidelity, Vanguard, Charles Schwab, TD Ameritrade, E*TRADE, or a self-directed IRA custodian. Most large brokerages offer free SEP-IRA accounts with no minimum balance and access to the same investment options as personal IRAs.
Execute a Written Agreement (IRS Form 5305-SEP)
Complete IRS Form 5305-SEP or a prototype plan document provided by your custodian. This one-page form establishes the SEP plan — it is NOT filed with the IRS. Keep it with your business records. Employers who use a prototype plan do not need Form 5305-SEP separately — the custodian's plan document suffices.
Provide Notice to Eligible Employees
Give each eligible employee a copy of the completed Form 5305-SEP (or a statement containing equivalent information) explaining the plan terms. Employees then open their own SEP-IRA accounts at the same or different institution — contributions are made directly into each employee's individual account.
Open SEP-IRA Accounts
Open a SEP-IRA account for yourself and for each eligible employee. Accounts are held in each individual's name — unlike a 401(k), there is no plan trust. Employees own and control their SEP-IRA accounts (with immediate 100% vesting) — they can invest as they choose within the account.
Calculate and Make Contributions
Determine the contribution percentage for the year. Calculate each eligible employee's contribution at the same percentage. Make contributions to each individual's SEP-IRA by the business return filing deadline. Contributions are deducted on the business tax return (Schedule C line 19, Form 1065 or 1120-S).
7. Contribution and Setup Deadlines
The SEP-IRA offers one of the most flexible deadlines of any retirement plan. You can establish a new SEP plan AND make the first contribution for a prior tax year right up to the filing deadline — including extensions.
| Business Entity | Return Due Date | With Extension | Extension Form |
|---|---|---|---|
| Sole Proprietor / Single-Member LLC (Schedule C) | April 15 | October 15 | Form 4868 |
| Partnership / Multi-Member LLC (Form 1065) | March 15 | September 15 | Form 7004 |
| S-Corporation (Form 1120-S) | March 15 | September 15 | Form 7004 |
| C-Corporation (Form 1120) | April 15 | October 15 | Form 7004 |
Extension Is for Contribution — Not Just Return
A key advantage: simply filing a tax return extension (Form 4868 for individuals) extends the SEP-IRA contribution deadline — even if no taxes are owed. A sole proprietor who discovers a high-profit year can file an extension and have until October 15 to open and fund a SEP-IRA for that year. Solo 401(k) plans, by contrast, must be established by December 31 of the contribution year (though contributions can be made until the filing deadline).
8. SEP-IRA vs. Solo 401(k): Head-to-Head Comparison
| Feature | SEP-IRA | Solo 401(k) |
|---|---|---|
| 2025 max contribution | $70,000 | $70,000 ($77,500 if 50+) |
| Employee elective deferral | None | $23,500 (+ $7,500 catch-up if 50+) |
| Catch-up contributions (50+) | None | $7,500 elective deferral catch-up |
| Roth option | No | Yes (Roth Solo 401k) |
| Employees allowed | Yes | Owner + spouse only |
| Plan establishment deadline | Tax return due + extensions | December 31 of plan year |
| Loan provision | No (IRA rules) | Up to 50% of balance, $50K max |
| Annual IRS filing | None (typically) | Form 5500-EZ if assets > $250K |
| Backdoor Roth impact | Creates pre-tax IRA balance (affects pro-rata) | No IRA balance — no pro-rata issue |
| Complexity / admin | Very low (Form 5305-SEP only) | Moderate (plan document + Form 5500-EZ) |
When Solo 401(k) Wins
At lower incomes, the Solo 401(k) elective deferral component allows you to shelter significantly more income. Example: self-employed with $60,000 net profit. SEP-IRA maximum: ~$11,200 (20% × $56,000 adjusted). Solo 401(k) maximum: $23,500 elective deferral + ~$11,200 employer profit sharing = $34,700 — more than 3× the SEP-IRA contribution at the same income level.
When SEP-IRA Wins
The SEP-IRA is preferable when you have employees (Solo 401(k) disallows employees), when you want maximum flexibility on setup timing (the extended deadline advantage), or when administrative simplicity is paramount. It is also better for business owners who want to contribute for eligible employees and already run a business entity with payroll.
9. SEP-IRA vs. SIMPLE IRA
| Feature | SEP-IRA | SIMPLE IRA |
|---|---|---|
| Max employer-only contribution | $70,000 | 3% match or 2% non-elective |
| Employee deferrals | None | $16,500 (2025) |
| Catch-up (50+) | None | $3,500 (2025) |
| Employee eligibility | Up to employer | $5,000 compensation in prior 2 years |
| Employer size limit | No limit | 100 or fewer employees |
| Early withdrawal penalty window | 10% (IRA rule) | 25% in first 2 years, then 10% |
| SIMPLE-to-IRA rollover timing | Immediate rollover allowed | Must wait 2 years from enrollment |
| Administrative burden | Very low | Low to moderate |
The SIMPLE IRA is best for businesses under 100 employees that want to offer employee salary deferrals (employee contribution feature) without the complexity of a 401(k), but with lower total contributions than the SEP-IRA. The SEP-IRA is best for higher-income self-employed individuals and business owners who prioritize maximum tax-deferred savings.
10. Multiple Businesses and Controlled Groups
Individuals with income from multiple businesses must aggregate contributions across all related entities for the Section 415 limit. The $70,000 total is the combined maximum across all employer plans — not per plan or per business.
A sole proprietor with two Schedule C businesses (e.g., freelance consulting + photography) can only contribute a combined $70,000 across both SEP-IRAs. The 25% compensation limit is calculated on combined self-employment income, adjusted for SE taxes.
Controlled Group Rules
If you own 80%+ of two businesses, they may be treated as a controlled group under IRS rules — requiring employees from both businesses to be covered by the SEP plan at the same contribution rate. Complex ownership structures (brother-sister corporations, parent-subsidiary arrangements) should be reviewed by a tax advisor to determine controlled group status. Failure to include controlled group employees can result in plan disqualification. Source: IRC §414(b), §414(c).
11. Distributions, RMDs, and Early Withdrawal Rules
SEP-IRA distributions follow Traditional IRA rules exactly — because a SEP-IRA is a Traditional IRA with special contribution provisions. All distributions are taxed as ordinary income. RMDs begin at age 73 (SECURE 2.0). The 10% early withdrawal penalty applies before age 59½ with the same 12 exceptions as the Traditional IRA.
Distributions can begin at any time after age 59½ without penalty. There is no requirement to wait until retirement or stop working. The flexibility to withdraw at 59½ with only ordinary income tax — combined with the large contributions possible through the SEP-IRA — makes it a powerful tool for self-employed individuals who retire early.
12. SEP-IRA Rollovers and Roth Conversions
SEP-IRA funds can be rolled over to other retirement accounts with flexibility:
- SEP-IRA → Traditional IRA: Tax-free direct transfer or 60-day rollover. No restrictions.
- SEP-IRA → 401(k): Eligible for direct rollover if the 401(k) plan accepts incoming rollovers. Useful to eliminate pre-tax IRA balance before backdoor Roth conversions.
- SEP-IRA → Roth IRA (Roth Conversion): SEP-IRA funds can be converted to Roth IRA. The converted amount is taxed as ordinary income. The pro-rata rule applies — all Traditional, SEP, and SIMPLE IRA balances are aggregated.
- 401(k) → SEP-IRA: Incoming rollovers from employer plans are accepted. SEP-IRAs can receive funds from 401(k), 403(b), 457(b), and other qualified plans.
SEP-IRA and Backdoor Roth Conflict
If you plan to use the backdoor Roth IRA strategy, note that SEP-IRA balances are included in the pro-rata calculation. A large SEP-IRA makes backdoor Roth conversions largely taxable. Consider rolling the SEP-IRA balance into your current employer's 401(k) — if the plan accepts rollovers — to clean up the pro-rata calculation before making non-deductible Traditional IRA contributions.
13. Investment Options
SEP-IRA investment options are identical to Traditional IRA options since a SEP-IRA is a type of IRA. Any investment permissible in a Traditional IRA is permissible in a SEP-IRA — stocks, ETFs, mutual funds, bonds, CDs, REITs, and (via self-directed custodians) real estate and private investments.
A common approach for high-contribution SEP-IRA accounts: use broad market index funds (total stock market, international equity, bond funds) to maintain low costs and tax efficiency within the account. Since all SEP-IRA distributions are taxed at ordinary income rates regardless of the investment type, there is no preferential treatment for long-term capital gains inside the account. For this reason, actively managed funds, REITs, and dividend-heavy investments (which generate less-tax-efficient distributions in taxable accounts) are appropriate to shelter inside a SEP-IRA.
14. Tax Strategy: Maximizing the SEP-IRA Deduction
The SEP-IRA deduction is an above-the-line deduction (Schedule 1, Line 16 for self-employed) — it reduces AGI, which cascades to reduce taxable income, self-employment tax base (indirectly), eligibility for ACA premium subsidies, and state income taxes.
Strategy 1: Defer Contributions to Last Possible Date
File a tax extension (Form 4868) to push the SEP contribution deadline to October 15. This gives you maximum time to assess actual net profit before determining the optimal contribution amount — especially useful if income is variable month to month.
Strategy 2: Use SEP to Stay Below Roth IRA Income Limits
If your MAGI is near the Roth IRA phase-out ($150,000 single / $236,000 MFJ), a SEP-IRA contribution reduces MAGI and may restore Roth IRA contribution eligibility. A $30,000 SEP contribution at $180,000 MAGI (single) brings MAGI to $150,000 — fully eligible for Roth IRA.
Strategy 3: Reduce QBI Deduction Impact
SEP-IRA contributions reduce net income from the business, which reduces the base for the Section 199A Qualified Business Income (QBI) deduction (20% of QBI). The net tax benefit of the SEP contribution must account for both the income tax deduction and the reduced QBI deduction — net effective marginal rate is typically 80-90% of the stated deduction value.
Strategy 4: Roth Conversion During Low-Income Years
After high-contribution years into a SEP-IRA, consider converting portions to Roth IRA in years when income is lower (between clients, between business cycles) to access tax-free growth and eliminate RMDs on converted amounts.
15. Common Mistakes to Avoid
✗ Calculating the contribution as 25% of gross income directly
Fix: For self-employed, the correct rate is effectively ~20% of net profit after the SE tax deduction. Use IRS Publication 560 Worksheet 1 — do not use gross revenue.
✗ Failing to include eligible employees at the same contribution percentage
Fix: SEP plans require uniform percentage contributions for all eligible employees. Discriminatory contributions lead to plan disqualification and excise taxes. Review employee eligibility annually.
✗ Not filing a tax extension when anticipating a retroactive contribution
Fix: Without an extension, the SEP contribution deadline is April 15. File Form 4868 even if no additional tax is owed — this alone extends the contribution deadline to October 15.
✗ Ignoring the SEP-IRA's impact on backdoor Roth conversions
Fix: SEP-IRA balances are included in the pro-rata calculation. High SEP-IRA balances make backdoor Roth conversions largely taxable. Consider rolling SEP funds to a 401(k) before implementing backdoor Roth.
✗ Assuming contributions are mandatory every year
Fix: SEP-IRA contributions are entirely discretionary — you can contribute 25% one year, 10% the next, and 0% the year after. This flexibility is a key advantage over certain other plan types.
✗ Contributing to employee SEP accounts at a different percentage than owner contributions
Fix: The same percentage rule is strictly enforced. Even a 1% difference between owner and employee contribution rates is a plan violation. Document and verify calculation uniformity each year.
16. Glossary
- SEP-IRA
- Simplified Employee Pension IRA — an employer-funded IRA with contribution limits up to $70,000 (2025), available to self-employed individuals and small business owners.
- Form 5305-SEP
- IRS prototype plan agreement establishing a SEP-IRA plan — not filed with the IRS, kept in business records and provided to employees.
- Net Self-Employment Income
- Schedule C profit minus the 50% deductible portion of self-employment tax — the base for calculating the self-employed SEP contribution.
- Section 415 Limit
- IRS annual additions limit on defined contribution plans — $70,000 for 2025, the maximum total contributions across all employer plans including SEP-IRA.
- Pro-Rata Rule
- IRS calculation aggregating all pre-tax IRA balances (including SEP-IRA) when determining the taxable portion of a Roth IRA conversion.
- Controlled Group
- Two or more businesses under common ownership (generally 80%+ by same individual) treated as one employer for retirement plan purposes — employees of all entities must be covered.
- Solo 401(k)
- One-participant 401(k) plan for self-employed individuals with no employees — allows both elective deferrals and employer profit-sharing, but cannot accommodate employees.
- SIMPLE IRA
- Savings Incentive Match Plan for Employees — for businesses with up to 100 employees, allows employee deferrals ($16,500 in 2025) but lower employer contribution maximums than SEP-IRA.
- QBI Deduction
- Section 199A Qualified Business Income deduction — 20% deduction for pass-through business income. SEP-IRA contributions reduce QBI, partially offsetting the SEP deduction benefit.
- Schedule SE
- IRS form for calculating self-employment tax (15.3% on first $176,100 of net earnings, 2.9% above that in 2025). The 50% deductible portion reduces the SEP-IRA contribution base.
17. Frequently Asked Questions
What is the SEP-IRA contribution limit for 2025?
For 2025, the SEP-IRA contribution limit is the lesser of $70,000 or 25% of the employee's compensation (W-2 wages). For self-employed individuals (sole proprietors, single-member LLCs, partners), the calculation is different: contributions are limited to 25% of net self-employment income after deducting the contribution itself, which effectively equals approximately 20% of net profit before the deduction. The compensation cap used in the 25% calculation is $350,000 for 2025 — meaning the maximum $70,000 contribution requires at least $280,000 in W-2 wages or equivalent self-employment income. Source: IRS Publication 560, IRC §415(c).
Who is eligible to open a SEP-IRA?
Any self-employed individual or small business owner can establish a SEP-IRA. Eligible business structures include: sole proprietors, partnerships, LLCs (single-member or multi-member), S-corporations, C-corporations, and non-profit organizations. There is no minimum business size or revenue requirement — even a side hustle with $5,000 in net profit qualifies. Employees qualify for SEP-IRA contributions from their employer if they are at least 21 years old, have worked for the employer in at least 3 of the last 5 years, and received at least $750 in compensation in 2025 (indexed for inflation). Employers may use less restrictive eligibility requirements but cannot use more restrictive ones.
How do I calculate my SEP-IRA contribution as a self-employed person?
Self-employed individuals must calculate their net self-employment income before computing the SEP-IRA contribution, because the contribution itself is deductible from income, creating a circular calculation. The IRS-approved formula: Step 1: Calculate net profit from Schedule C (or Schedule K-1 for partnerships). Step 2: Subtract the deductible portion of self-employment tax (Schedule SE, Line 13 × 50%). Step 3: Multiply by 20% (the effective equivalent of 25% after backing out the contribution). Example: Net profit $100,000 − $7,065 (SE tax deduction) = $92,935 × 20% = $18,587 maximum SEP contribution. IRS Publication 560 includes a Deduction Worksheet that handles the circular calculation precisely.
What are the SEP-IRA employee inclusion rules?
If you have employees, you must contribute to their SEP-IRAs at the same percentage of compensation that you contribute to your own. This is the most significant planning constraint of SEP-IRAs vs. Solo 401(k). For example, if you contribute 25% of your own compensation ($70,000 on $280,000 salary), you must also contribute 25% of each eligible employee's W-2 wages. An employee earning $50,000 would require a $12,500 employer SEP contribution. There is no provision for employee salary deferrals or Roth SEP contributions — all SEP contributions are made by the employer and are immediately 100% vested. Source: IRS Publication 560, Chapter 2.
Can I have a SEP-IRA and a Traditional IRA at the same time?
Yes. A SEP-IRA contribution does not affect your ability to make a separate Traditional or Roth IRA contribution of up to $7,000 ($8,000 if 50+). The two types of accounts have separate contribution limits. However, SEP-IRA participation counts as having a 'workplace plan' for purposes of the Traditional IRA deductibility phase-out. This means if your MAGI exceeds $79,000 (single) or $126,000 (MFJ) in 2025, your Traditional IRA contribution will not be deductible — though you can still contribute as a non-deductible contribution or to a Roth IRA (if income permits).
What is the SEP-IRA setup and contribution deadline?
A SEP-IRA can be established and funded up to the business tax return filing deadline, including extensions. For sole proprietors and single-member LLCs (Schedule C filers), this is April 15, extended to October 15 with a valid extension. For partnerships (Form 1065), the deadline is March 15, extended to September 15. For S-corporations and C-corporations, it is March 15 (April 15 for C-corps), extendable by 6 months. Critically, unlike 401(k) plans, a SEP-IRA can be opened AND funded for the prior tax year before the deadline — even as late as October 15 of the following year if an extension is filed. This flexibility makes the SEP-IRA uniquely useful for retroactive retirement planning after a high-income year.
Is a SEP-IRA better than a Solo 401(k)?
It depends primarily on your income level and whether you have employees. At higher incomes (above approximately $285,000 in net self-employment profit), both plans reach the $70,000 limit — roughly equivalent. At lower incomes, the Solo 401(k) is often superior because it allows both an employee elective deferral ($23,500 in 2025, plus $7,500 catch-up if 50+) AND an employer profit-sharing contribution (25% of compensation). The elective deferral component allows the Solo 401(k) to reach the maximum contribution faster at lower income levels. However, Solo 401(k) plans have no employees allowed (except a spouse), require a plan document, and must file Form 5500-EZ once assets exceed $250,000. The SEP-IRA is simpler to administer — only IRS Form 5305-SEP is needed — and can accommodate employees.
Are SEP-IRA contributions tax-deductible?
Yes. SEP-IRA contributions are fully tax-deductible for the employer. For self-employed individuals, the SEP-IRA contribution is deducted on Schedule 1, Line 16 of Form 1040 — an 'above-the-line' deduction that reduces AGI regardless of whether you itemize or take the standard deduction. This deduction reduces both federal income tax and (to a limited extent) self-employment tax indirectly by reducing net income. For business entities (S-corps, C-corps, partnerships), the employer contribution is a deductible business expense on the entity's return. SEP-IRA funds grow tax-deferred and all distributions are taxed as ordinary income in the year withdrawn.