SEP IRA: The Complete Guide (2026)

What Is a SEP IRA?

SEP stands for Simplified Employee Pension. A SEP IRA is a retirement plan that allows employers to make tax-deductible contributions to a Traditional IRA set up for each eligible employee, including themselves.

The word "simplified" is doing some heavy lifting. Setting up a SEP is genuinely easier than a 401(k). No annual Form 5500 filing. No nondiscrimination testing. No plan document that costs thousands to draft. You fill out IRS Form 5305-SEP, open the accounts, and start contributing.

But the contribution math for self-employed individuals is anything but simple. More on that below.

A SEP IRA is not its own special account type. It's a Traditional IRA that receives employer contributions under a SEP plan. It follows the same withdrawal rules, RMD rules, and tax treatment as any Traditional IRA. The difference is how the money gets in.

Who Can Set Up a SEP?

Any business can establish a SEP plan, regardless of size or structure. That includes:

• Sole proprietorships
• Partnerships
• LLCs (single-member and multi-member)
• S corporations
• C corporations

If you're self-employed with no employees, a SEP works beautifully. If you have employees, it still works, but you need to understand the equal contribution requirement (covered below).

There's no minimum or maximum number of employees. A one-person freelancer and a 50-person firm can both use a SEP.

Who Must Be Included?

This is where SEP plans create obligations most small business owners don't expect.

An employee must be included in the SEP plan if they meet all three of the following conditions:

1. Age: At least 21 years old
2. Service: Worked for the employer in at least 3 of the last 5 years
3. Compensation: Earned at least $800 from the employer in 2026

The employer can set less restrictive requirements (for example, including employees after 1 year instead of 3). But they can't be more restrictive than the IRS minimums above.

You can exclude employees covered by a union collective bargaining agreement and nonresident aliens with no U.S. income.

2026 Contribution Limits

So the absolute maximum contribution for any one person is 25% of $360,000 = $72,000 (which happens to equal the dollar cap).

A few critical details:

Only the employer contributes. Employees cannot make their own contributions to a SEP IRA. The employer decides how much to contribute each year and makes the contribution on behalf of each eligible employee.

Contributions are not required every year. The employer can contribute 25% one year, 10% the next, and nothing the year after. This flexibility is one of the SEP's biggest advantages for businesses with variable cash flow.

The percentage must be the same for everyone. Whatever percentage the employer contributes for themselves must be the same percentage contributed for every eligible employee. You can't contribute 25% to your own SEP and 5% to your employees'.

Contributions are immediately 100% vested. The money belongs to the employee the moment it hits the account. Unlike a 401(k) where vesting schedules can apply to employer matches, SEP contributions are the employee's money from day one.

The Self-Employment Math Trap

This is the section that matters most if you're self-employed. The contribution calculation is not what you think it is.

For W-2 employees, the math is simple: 25% of compensation. Done.

For self-employed individuals (sole proprietors and partners), the math gets circular. Your SEP contribution is a deduction. That deduction reduces your net income. But your contribution is calculated as a percentage of your net income. So the contribution reduces the income it's calculated on.

The IRS solves this with an adjusted rate. The effective maximum contribution rate for self-employed individuals is approximately 20% of net self-employment income, not 25%.

The Calculation Step by Step

1. Start with your net profit from Schedule C (or Schedule K-1 for a partnership).
2. Subtract the deductible portion of your self-employment tax (half of your SE tax).
3. That gives you your adjusted net business income.
4. Apply the adjusted rate. If you want to contribute the maximum (25%), the adjusted rate is 20% (technically 0.25 ÷ 1.25 = 0.20).
5. Multiply your adjusted net business income by 20%. That's your maximum SEP contribution.

A Real Example

You're a sole proprietor with $100,000 net profit on Schedule C.

Your self-employment tax is approximately $14,130. Half of that is $7,065.

Adjusted net business income: $100,000 − $7,065 = $92,935

Maximum SEP contribution at 20%: $92,935 × 0.20 = $18,587

Notice that's not $25,000 (25% of $100,000). The circular deduction reduces the effective rate.

The Contribution Deadline

SEP contributions can be made up to the employer's tax filing deadline, including extensions.

For a sole proprietor filing by April 15, 2027, the SEP contribution for 2026 is due by April 15, 2027. File an extension to October 15, and you have until October 15.

This is one of the SEP's biggest tactical advantages. You can wait until you see your final income numbers, calculate the exact contribution, and fund the SEP before you file. You don't have to guess during the year.

SEP IRA vs. Other Small Business Plans

SEP IRA vs. Solo 401(k)

This is the most common comparison for self-employed individuals with no employees.

The Solo 401(k) allows both employee deferrals (up to $24,500 in 2026, plus catch-up) and employer profit-sharing contributions (up to 25% of compensation). The combined limit is $72,000 (same as the SEP), but the employee deferral lets you front-load more at lower income levels.

A self-employed person earning $60,000 can contribute $24,500 as an employee deferral to a Solo 401(k), plus approximately $12,000 as an employer contribution. That's $36,500 total. The same person's maximum SEP contribution would be roughly $11,150 (20% of adjusted net income). The Solo 401(k) wins at lower incomes.

At higher incomes, the two plans converge toward the same $72,000 maximum.

The Solo 401(k) also allows Roth contributions, loan provisions (if the plan document allows it), and catch-up contributions for those 50 and older. The SEP allows none of these.

The trade-off: the Solo 401(k) requires a plan document, may require a Form 5500-EZ once assets exceed $250,000, and must be established by December 31 (not the tax filing deadline).

SEP IRA vs. SIMPLE IRA

SIMPLE IRAs allow employee salary deferrals (up to $17,000 in 2026, plus catch-up) with a mandatory employer match or non-elective contribution. Lower contribution ceiling than a SEP. More administrative requirements. Better for businesses with employees who want to let those employees contribute their own money.

SEP IRAs are employer-funded only. Higher contribution ceiling. Less administration. But you carry the full cost of funding every employee's contribution.

When the SEP Wins

The SEP is the right choice when you want maximum simplicity, you're starting late in the year (you can set it up at tax time), your income is high enough that the 20% effective rate still produces a meaningful contribution, and you have few or no employees.

The Roth SEP IRA

SECURE Act 2.0 made it possible for employers to offer Roth SEP IRA contributions starting in 2023. This means the employer can designate contributions as Roth (after-tax) instead of traditional (pre-tax).

With a Roth SEP contribution, the employer doesn't get the tax deduction in the contribution year, but the money grows tax-free and comes out tax-free in retirement (assuming the 5-year rule is met). Compare the tax impact with our free Roth vs. Traditional Comparison Tool.

How Withdrawals Work

A SEP IRA follows the same withdrawal rules as a Traditional IRA, because it is a Traditional IRA.

Before 59½: Withdrawals are taxed as ordinary income plus a 10% early withdrawal penalty, unless an exception applies. The same exceptions that apply to Traditional IRAs (disability, first-time home purchase, SEPP, etc.) apply to SEP IRAs.

After 59½: No penalty. Withdrawals are taxed as ordinary income.

RMDs start at 73 (or 75 if born in 1960 or later). For those born in 1959, the IRS has clarified the RMD age is 73 due to a SECURE 2.0 drafting error. Same rules as any Traditional IRA. See our Traditional IRA guide for the full withdrawal breakdown.

There are no loan provisions in a SEP IRA. If you need access to the money before 59½, your only option is a distribution (with taxes and potential penalty) or a rollover to another account.

Rollovers

SEP IRA funds can be rolled over to a Traditional IRA, another SEP IRA, a 401(k), a 403(b), or a governmental 457(b). The standard 60-day rollover rule applies if you take a distribution, and direct trustee-to-trustee transfers are unlimited.

You can also roll a SEP IRA into a Roth IRA — this is a Roth conversion, and the converted amount is taxable income in the year of conversion.

Tax Deductions

Employer contributions to a SEP IRA are tax-deductible. For sole proprietors and partners, the deduction is taken on Form 1040, Schedule 1 — not on Schedule C. For corporations, it's a business expense on the corporate return.

The deduction cannot exceed 25% of total compensation paid to all plan participants. If you contribute more than 25%, the excess is not deductible and is subject to a 10% excise tax.

Setting Up a SEP

1. Complete IRS Form 5305-SEP (or a prototype plan document from your custodian). This is the plan document. You don't file it with the IRS — keep it in your records.
2. Open SEP IRA accounts for yourself and each eligible employee at a custodian of your choice.
3. Provide each employee with a copy of Form 5305-SEP and information about the plan.
4. Make contributions by the tax filing deadline (including extensions).

There's no annual filing requirement. No Form 5500. No compliance testing. That's the "simplified" part of Simplified Employee Pension.

Common Mistakes

Using 25% Instead of the Adjusted Rate

Self-employed individuals calculate their contribution at 25% of net profit instead of the effective ~20% rate. This results in over-contributions. The 10% excise tax on excess contributions applies for every year the excess stays in the account.

Contributing Different Percentages for Employees

If you contribute 15% for yourself, every eligible employee gets 15% too. Contributing a lower percentage for employees while maximizing your own is a plan violation.

Not Including All Eligible Employees

The 3-of-5 year service test, the $800 minimum compensation, and the age 21 requirement are the maximums for exclusion. If an employee meets all three, they must be included. Seasonal workers and part-time employees who meet the criteria count.

Treating SEP Contributions as Employee Deferrals

SEP contributions are employer contributions. They don't come from the employee's paycheck. If employees want to defer their own salary into a retirement plan, they need a SIMPLE IRA or a 401(k), not a SEP.

Missing the Deadline

The contribution deadline is the tax filing deadline, including extensions. Miss it and the contribution doesn't count for the prior year. There's no way to make it up retroactively.

Deducting the Contribution on Schedule C

Self-employed individuals deduct their own SEP contribution on Form 1040, Schedule 1 — not on Schedule C. Deducting on Schedule C reduces your net self-employment income, which affects your SE tax and your contribution calculation. Contributions for employees are deducted on Schedule C as a business expense.

Forgetting the Pro-Rata Rule

If you have a SEP IRA with pre-tax money and you want to do a Backdoor Roth, the SEP balance is included in the pro-rata calculation. The IRS looks at all your Traditional, SEP, and SIMPLE IRA balances combined. This catches people who thought their SEP was separate from their Traditional IRA for conversion purposes.

FAQ

Related Reading

• Solo 401(k) vs. SEP IRA: Why One Quietly Crushes the Other
• SEP IRA vs. SIMPLE IRA: Two Great Plans We Overthink Every Day
• The Business Owner's Exception: SEP IRA & Tax Extension
• The Pro-Rata Rule in Roth and Traditional IRAs: Why It Ruins Backdoor Roths
• When a Backdoor Roth Works on Paper but Fails on the Tax Return
• Why Solo 401(k) Deadlines Depend on How Your Business Is Structured