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What is a SEP IRA?

Nicolas StrautBy Nicolas StrautPublished 8 min read

Key takeaways

  • SEP IRA contributions for 2026 can reach $72,000, and the pay an employee needs to become eligible rises to $800 from $750 in 2025.1
  • You can open a SEP IRA with any amount of self-employment income, including freelance or 1099 work on the side of a W-2 job, and for a sole proprietor the SEP IRA limit is 20% of net profit after subtracting half of self-employment tax, not 25%.
  • A SEP IRA for tax year 2026 can be opened and funded as late as your extended filing deadline, October 15, 2027, so you can set the SEP IRA amount after you know the year's profit.
In this article

A SEP IRA is a traditional IRA that your business funds with employer contributions, and a self-employed person counts as both the employer and the employee. It takes far more than a regular IRA, has no annual IRS filing in most cases, and lets you skip a year. This guide covers how a SEP IRA works, who can open one, the 2026 limits, and how to set one up.

What is a simplified employee pension plan?

A simplified employee pension plan, or SEP, is a retirement plan that lets any employer, including a self-employed person, contribute to traditional IRAs set up for itself and its employees.2 The account each person holds is called a SEP IRA. It is a traditional IRA that accepts employer contributions, so it follows traditional IRA rules once the money is in.

Any business can use one: sole proprietors, single-member LLCs, partnerships, and corporations, including S corporations.

How does a SEP IRA work?

A SEP IRA works by having your business, not you as an employee, put money into a traditional IRA in your name, and the business deducts what it puts in.

  • Employer contributions only: There is no salary deferral, so the whole contribution comes from the business side.
  • Fully vested from day one: Every contribution belongs to the account holder immediately.
  • No set amount each year: You can contribute any amount up to the limit, or nothing, and decide each year.
  • One percentage for everyone: If you contribute for yourself, every eligible employee gets the same percentage of pay.
  • Tax-deferred growth: Investments grow untaxed until you withdraw, and withdrawals are taxed as ordinary income.

Benefits and disadvantages of a SEP IRA

The benefits of a SEP IRA are a high limit and light paperwork, and the disadvantages are smaller contributions at lower profits and the duty to cover employees.

Benefits of a SEP IRA

The benefits of a SEP IRA come down to four things: the limit, the paperwork, the flexibility, and the deadline.

  • The 2026 limit of $72,000 is more than 9 times the $7,500 traditional IRA limit.
  • There is generally no annual IRS filing, including Form 5500.
  • Contributions can change or stop from year to year.
  • You can open one after the year ends, up to your extended filing deadline.

Disadvantages of a SEP IRA

The disadvantages of a SEP IRA are four limits a Solo 401(k) or a regular IRA does not have.

  • There is no employee deferral, so at most profit levels a one-person business can put more into a Solo 401(k). The Solo 401(k) vs SEP IRA guide compares the two at six levels of profit.
  • There are no catch-up contributions at 50 or older.
  • Loans are not allowed.
  • Every eligible employee gets the same percentage you give yourself.

Who can open a SEP IRA?

Anyone with self-employment income can open a SEP IRA, including freelancers, 1099 contractors, gig workers, and single-member LLC owners. A W-2 job elsewhere does not stop you: the IRS says you can set up a SEP for your self-employed business even if you are covered by your employer's plan at a second job.3

Can I have a SEP IRA if I have no employees?

Yes, you can have a SEP IRA if you have no employees, and you are the only participant. Your contribution is figured on your net earnings from self-employment, covered in the contribution section below.

Which employees a SEP IRA has to cover

A SEP IRA has to cover every employee who meets three tests, unless your plan sets looser ones.

Scroll horizontally to see more columns.
Test2026 rule
Age21 or older
ServiceWorked for you in at least 3 of the last 5 years
PayAt least $800 of compensation in 2026

The rate you choose for yourself sets theirs. At a 25% plan rate, an employee paid $50,000 receives $12,500, and your own contribution is 20% of your net profit after half of SE tax.

4 differences between a SEP IRA and a traditional IRA

The 4 differences between a SEP IRA and a traditional IRA are who puts the money in, how much can go in, how the deduction works, and when the deadline falls.

Scroll horizontally to see more columns.
DifferenceSEP IRATraditional IRA
Who contributesYour business, as the employerYou, as an individual
2026 limitLesser of 25% of compensation or $72,000 (20% of net profit after half of SE tax for a sole proprietor)$7,500
DeductionDeductible at any income; a sole proprietor deducts it on Schedule 1Can phase out if you or your spouse is covered by a workplace plan
2026 deadlineYour filing deadline including extensions, up to October 15, 2027April 15, 2027

Once the money is in, a SEP IRA follows traditional IRA rules for investments, withdrawals, and required minimum distributions. You can have both, because the IRS says employer SEP contributions do not affect what you can put into an IRA on your own behalf.

SEP IRA contribution limits for 2026

SEP IRA contribution limits for 2026 are the lesser of 25% of compensation or $72,000, up from $70,000 in 2025.4

Scroll horizontally to see more columns.
Limit20252026
Maximum contribution per person$70,000$72,000
Compensation counted, maximum$350,000$360,000
Minimum pay for an employee to be eligible$750$800
Plan contribution rate, maximum25% of compensation25% of compensation
Effective rate for a sole proprietor20% of net profit after half of SE tax20% of net profit after half of SE tax

For a one-person business, the $72,000 cap only binds at about $376,000 of net profit, so for most freelancers the 20% rate is the limit that matters.

How to open a SEP IRA in 4 steps

You can open a SEP IRA in 4 steps, and a self-employed person with no employees can finish the first three in one sitting with a brokerage.

Step 1: Choose your plan document

Choose your plan document first: the IRS model Form 5305-SEP, or a prototype document from the financial institution that will hold the account. Form 5305-SEP is free and is not filed with the IRS. You can't use it if you also maintain another qualified plan, use leased employees, or want a plan year other than the calendar year.

Step 2: Sign the agreement and tell eligible employees

Sign the agreement, then give each eligible employee information about the SEP. With no employees, signing is the whole step, so keep the signed copy with your records.

Step 3: Open a SEP IRA for yourself and each eligible employee

Open a SEP IRA for yourself and each eligible employee at a bank, brokerage, insurance company, or other qualified financial institution. Some providers let a traditional IRA receive SEP money, and most open a separate account labeled SEP IRA. Fees and investment choices vary, so compare the best SEP IRA providers before you open one.

Step 4: Contribute by your tax filing deadline

Contribute by your tax filing deadline for the year, including extensions, which is also the last day to set up a SEP IRA for that year.

Scroll horizontally to see more columns.
For tax year 2026Deadline
Set up and fund, no extension filedApril 15, 2027
Set up and fund, with a Form 4868 extensionOctober 15, 2027

If you'll miss April 15, 2027, file Form 4868 by that date, because the extension is what keeps the SEP window open to October.

How much can a self-employed person contribute to a SEP IRA?

A self-employed person can contribute up to 20% of net profit after subtracting half of self-employment tax to a SEP IRA, capped at $72,000 for 2026. The plan says 25%, but your compensation is measured after your own contribution, so the IRS has you apply a reduced rate instead.5 The Solo 401(k) vs SEP IRA guide walks through the full method.

Most a sole proprietor can contribute to a SEP IRA, by net profit, 2026
$50,000
$9,294
$100,000
$18,587
$150,000
$27,881
$200,000
$37,177
$300,000
$56,909
$400,000
$72,000

Source: Solvent calculation: 20% of net profit after half of self-employment tax, capped at $72,000. IRS Publication 560.

If you're a sole proprietor or single-member LLC owner

If you're a sole proprietor or single-member LLC owner, start from your Schedule C net profit, subtract half of your self-employment tax, and take 20% of the result.

On $80,000 of net profit, that is $80,000 minus $5,651.82, or $74,348.18, times 20%, for about $14,870. Applying 25% instead gives about $18,587, which is $3,717 more than the IRS allows.

If you're an S corp owner paid W-2 wages

If you're an S corp owner who is paid W-2 wages, your SEP IRA contribution is up to 25% of those wages, because wages are not reduced by your own contribution. A salary of $60,000 allows up to $15,000, and distributions from the S corp do not count.

Run your net profit through the Solvent Self-Employment Tax Calculator to get the half of self-employment tax you subtract.

Solvent self-employment tax calculator

Calculate your self-employment tax

Open the Solvent Self-Employment Tax Calculator

How SEP IRA contributions lower your taxes

SEP IRA contributions lower your taxes by reducing your taxable income for the year, and a sole proprietor deducts them on line 16 of Schedule 1, not on Schedule C. The saving is roughly your contribution times your top income tax bracket rate, and a contribution that spans two brackets saves at a blend of both.

A SEP IRA contribution does not lower your self-employment tax, which is figured on net profit before the contribution comes out.

Your plan can also accept Roth contributions, which are taxed now instead of later, and the Solo 401(k) vs SEP IRA guide covers how they work.

How to estimate quarterly taxes after a SEP IRA contribution

To estimate quarterly taxes after a SEP IRA contribution, run your expected net profit through the Solvent Quarterly Tax Estimator, then reduce your income tax estimate once the contribution is in the account. The estimator does not take a retirement contribution as an input, so reserve at the full amount until you have funded the SEP IRA.

Frequently asked questions about SEP IRAs

Which is better, Roth IRA or SEP IRA?

Neither a Roth IRA nor a SEP IRA is better in every case, and you can have both. A Roth IRA takes after-tax money and has income limits. A SEP IRA takes much larger pre-tax contributions from your business, so you can fund it for the deduction and a Roth IRA on the side.

Can you max out a 401k and a SEP IRA in the same year?

Yes, you can max out a 401(k) at your job and a SEP IRA for your own business in the same year. Your 401(k) deferral at work does not reduce your SEP IRA limit, which is figured only on your self-employment income. As a sole proprietor, you can still put in up to 20% of net profit after half of SE tax.

Can I withdraw money from a SEP IRA?

Yes, you can withdraw money from a SEP IRA at any time, because it follows the same rules as a traditional IRA. Withdrawals are taxed as ordinary income, and before age 59½ you generally owe an extra 10% tax unless an exception applies. SEP IRAs allow no loans.

What happens if I contribute too much to a SEP IRA?

If you contribute too much to a SEP IRA, the amount over your limit is not deductible and has to be corrected. The common cause for a sole proprietor is applying 25% to net profit instead of 20% after half of SE tax. Ask your SEP IRA provider to remove the excess, and confirm the reporting with a tax professional.

Can my spouse be in my SEP IRA?

Yes, your spouse can be in your SEP IRA if they work for your business and meet the plan's eligibility tests. Your spouse gets their own SEP IRA account, and the business contributes the same percentage of their pay that it contributes for every other eligible employee.

About the author

Nicolas Straut

Nicolas Straut

Personal and business finance writer, former Forbes contributor

Nicolas Straut writes about self-employment and quarterly tax, LLC formation and costs, and tax software for Solvent. He has written about money for about ten years, including for the fintech companies NorthOne and Fundera. He files his own taxes as a freelancer. He isn't a CPA or an enrolled agent (EA).

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This page describes federal SEP rules for a self-employed owner using 2026 limits from IRS Notice 2025-67. Contribution examples assume a sole proprietor filing single with no employees. Plan documents and providers can set stricter rules than the law. Solvent provides educational estimates, not tax advice. Confirm your specific situation with a qualified tax professional.

Sources

  1. https://www.irs.gov/pub/irs-drop/n-25-67.pdf
  2. https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep
  3. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
  4. https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps
  5. https://www.irs.gov/publications/p560