What is a SEP IRA?

A SEP IRA (Simplified Employee Pension IRA) is a retirement account that a business funds on behalf of its owner and employees. Only the employer contributes, the contribution is tax-deductible, and for 2026 it can be as much as 25% of compensation, up to $72,000 per employee.

Any business can set one up, including a self-employed person with no staff. A freelancer or sole proprietor is the employer, so the employer contribution goes into their own account. The account itself is a traditional IRA with a much higher funding limit, and there’s no annual filing with the IRS.

SEP IRA Contribution Limits for 2026

For 2026, an employer can contribute the lesser of 25% of an employee’s compensation or $72,000. Only the first $360,000 of compensation counts, though at 25% the $72,000 cap is reached at $288,000 of pay, so the dollar cap is the one that binds.

Contributions are optional. You can fund the plan in a strong year and skip it entirely in a weak one.

SEP IRA Calculator: How to Figure a Self-Employed Contribution

If you’re paid a W-2 salary, including from your own S corporation, the calculation is 25% of that salary. If you’re a sole proprietor or partner, the rate that applies to you is 20%, because your compensation is defined as net earnings after subtracting the contribution itself. A 25% contribution on what’s left over works out to 20% of the amount before it (0.25 / 1.25).

SEP Contribution = (Net Profit - Half of Self-Employment Tax) x 20%

Take a sole proprietor with $100,000 of net profit in 2026 and no other earned income:

That’s about 18.6% of net profit. Reaching the full $72,000 takes $360,000 of net earnings, or roughly $376,000 of net profit for someone with no W-2 wages elsewhere.

The deduction is worth your marginal rate, and you can see how each additional slice of income is taxed in the Progression view of ProjectionLab’s tax analytics.

SEP IRA Rules: Who Is Eligible

A business of any size can adopt a SEP. Once it does, it has to include every employee who meets all three of these tests:

• Is at least 21 years old
• Has worked for the business in at least 3 of the last 5 years
• Earned at least $800 from the business in 2026

An employer can set looser requirements, such as covering employees from their first year, but not stricter ones. Employees covered by a union agreement and nonresident aliens with no US income from the business can be left out.

Contributions also have to be uniform. Under the IRS model plan, whatever percentage of pay you contribute for yourself, you contribute for every eligible employee. Put in 15% of your own compensation and each of them gets 15% of theirs, and the money is theirs immediately, since SEP contributions are always 100% vested. With no employees, the rule has no effect. With long-tenured staff, it multiplies the cost of every point you contribute for yourself.

SEP IRA Contribution Deadline and Setup

You can both open and fund a SEP IRA as late as the due date of your business’s tax return for the year, including extensions. A calendar-year sole proprietor who files an extension for 2026 has until October 15, 2027 to set up the plan and make the 2026 contribution.

Setting one up means signing a written plan document, either the IRS model Form 5305-SEP or a provider’s own version, and opening a SEP IRA for each eligible employee.

Roth SEP IRA

Since 2023, SECURE 2.0 has allowed employer contributions to go into a Roth SEP IRA if the plan offers it and the employee elects it. The employer isn’t required to offer the option, and a provider has to support it.

Roth SEP contributions count as taxable income to you in the year they’re made and are reported on Form 1099-R. In exchange, qualified withdrawals come out tax-free.

SEP IRA vs. Solo 401(k) vs. SIMPLE IRA

The SEP and the Solo 401(k) share a $72,000 ceiling, but the Solo 401(k) gets there at a much lower income because it stacks an employee deferral on top of the same employer contribution. The sole proprietor with $100,000 of net profit can put $18,587 into a SEP IRA or $43,087 into a Solo 401(k). The deferral limit is per person across all 401(k) plans, so that advantage shrinks if you already defer at a day job.

A SIMPLE IRA lets staff save from their own paychecks and obliges the employer to contribute every year. A SEP leaves the employer free to contribute nothing, and gives employees no way to add to the plan themselves.

SEP IRA Withdrawal Rules

A SEP IRA follows traditional IRA rules once the money is in. Withdrawals are taxed as ordinary income, and those taken before age 59 1/2 owe an additional 10% tax unless an exception applies. Loans aren’t permitted. Required minimum distributions (RMDs) begin at 73 if you were born between 1951 and 1959, or at 75 if you were born in 1960 or later.

How a SEP IRA Affects a Backdoor Roth IRA

A pre-tax SEP IRA balance counts under the pro-rata rule. Form 8606 treats your traditional, SEP, and SIMPLE IRAs as one pool, measured as your year-end balance plus any distributions and conversions during the year, and taxes each conversion in proportion to the pre-tax share of that pool.

Say you hold $93,000 in a SEP IRA, make a $7,500 nondeductible traditional IRA contribution, and convert that $7,500. Pre-tax money is $93,000 of your $100,500 total, so about $6,940 of the conversion is taxable and only $560 comes across tax-free.

Balances in a 401(k) aren’t part of that pool. Rolling the SEP IRA into a Solo 401(k) or a workplace plan that accepts incoming rollovers before year-end takes it out of the calculation.

Frequently Asked Questions

Are SEP IRA contributions tax deductible? Yes, for traditional SEP contributions. A business deducts what it contributes for employees as a business expense, and the employees don’t pay income tax on it until withdrawal. A sole proprietor or partner deducts the contribution to their own account on Schedule 1 of Form 1040 instead, which lowers income tax but not self-employment tax.

Is a SEP IRA a traditional IRA? Yes. It’s a traditional IRA that receives employer contributions under a SEP plan, with the same investment, withdrawal, and rollover rules. An employee can’t add to the plan through payroll, but if the provider permits it, you can make your own regular IRA contributions to the same account, within the normal $7,500 limit for 2026 ($8,600 if you’re 50 or older).

Can you have a SEP IRA and a Roth IRA? Yes. Employer SEP contributions don’t reduce the $7,500 you can put into your own IRAs for 2026. Roth IRA eligibility still phases out by income: $153,000 to $168,000 for single and head of household filers, $242,000 to $252,000 for married filing jointly, and $0 to $10,000 for married filing separately. Receiving a SEP contribution also makes you an active participant in a workplace plan, so a traditional IRA deduction phases out between $81,000 and $91,000 for single filers, $129,000 and $149,000 for married filing jointly, and $0 and $10,000 for married filing separately.

Can you have a Solo 401(k) and a SEP IRA? You can, but it doesn’t create extra room. Employer contributions to both plans for the same business count toward a single $72,000 limit for 2026, and you can’t use the IRS model Form 5305-SEP while maintaining another qualified plan. A SEP for your own business alongside a 401(k) at an unrelated employer is a different case, and the IRS allows it.