A SEP IRA, or Simplified Employee Pension Individual Retirement Arrangement, is a retirement plan that lets self-employed people and small-business owners make potentially large contributions for themselves and eligible employees.
Unlike a 401(k), a standard SEP generally does not let employees defer part of their salary into the plan. Instead, the employer makes contributions to SEP-IRAs owned by participating employees.
For 2026, an employer can generally contribute the lesser of 25% of eligible compensation or $72,000 per participant. Self-employed individuals have a special calculation, so the headline 25% figure does not simply mean 25% of business profit.
What Is a SEP IRA?
SEP stands for Simplified Employee Pension. It is an employer-sponsored retirement arrangement designed primarily for businesses, including sole proprietorships and self-employed individuals.
A SEP works through individual retirement accounts. The business establishes the SEP arrangement, and contributions go into separate SEP-IRAs for eligible participants.
Each employee owns the money in their own account and controls how those funds are invested. Contributions are immediately 100% vested.
The biggest difference between a SEP IRA and a regular traditional IRA is who makes the contribution and how much can be contributed. A regular IRA has a relatively low annual individual contribution limit. A SEP can allow much larger employer contributions.
For 2026, the regular IRA contribution limit is $7,500, or $8,600 for someone age 50 or older. The SEP contribution limit can be as high as $72,000, subject to the compensation and percentage limits.
How Does a SEP IRA Work?
The basic flow is straightforward:
Business → SEP contribution → participant’s SEP-IRA → investments → retirement withdrawals
The business decides whether to make a contribution for the year, subject to the plan’s rules. If contributions are made, eligible employees generally must receive contributions under the same contribution formula used for the owner.
For example, suppose a business chooses to contribute 10% of compensation to its SEP. If the owner receives an eligible $100,000 of compensation, the owner’s contribution would be $10,000. An eligible employee receiving $50,000 of compensation would generally receive $5,000.
This proportional requirement is one of the most important SEP IRA rules for business owners with employees. A SEP is not normally a way to make a large contribution for yourself while giving eligible employees a smaller percentage.
Who contributes to a SEP IRA?
The employer makes the SEP contribution. A standard SEP does not operate like a 401(k) where employees choose to defer part of each paycheck.
However, an individual can generally make separate contributions to the same IRA under the regular IRA rules, provided the applicable requirements are met. The IRS distinguishes these individual IRA contributions from employer contributions made under the SEP arrangement.
For a self-employed person, the situation is different conceptually because the individual is both the business owner and the participant. The contribution for the owner’s own SEP-IRA is subject to special self-employment calculations.
Who Can Have a SEP IRA?
SEP IRAs are commonly used by:
- Sole proprietors
- Independent contractors
- Freelancers
- Partnerships
- S corporations
- C corporations
- Other eligible small businesses
A business can establish a SEP even if it has no employees other than the owner.
The important question changes when a business has employees. Under the standard SEP eligibility rules, an employee generally must:
- Be at least 21 years old
- Have worked for the employer in at least 3 of the preceding 5 years
- Have received at least $800 in compensation from the employer during 2026
A SEP can use less restrictive requirements, but it generally cannot make the requirements more restrictive than the applicable SEP rules.
Certain employees, including some employees covered by qualifying collective bargaining agreements and certain nonresident aliens, may be excluded.
Part-time and seasonal workers cannot simply be excluded because they are part-time or seasonal if they otherwise satisfy the applicable eligibility requirements.
How Much Can You Contribute to a SEP IRA in 2026?
For 2026, the maximum SEP contribution for an employee is generally the lesser of:
| Limit | 2026 amount |
|---|---|
| Percentage of compensation | 25% |
| Maximum contribution | $72,000 |
| Maximum compensation considered | $360,000 |
The $72,000 limit is therefore the maximum contribution under the standard SEP formula, not an automatic contribution amount.
For example, if an eligible employee has $100,000 of compensation and the business uses a 15% contribution rate, the SEP contribution would be $15,000.
If the business uses a 25% rate, the calculation would be $25,000.
The compensation limit matters for higher earners. Once compensation exceeds $360,000 for 2026, the amount above that threshold generally is not included when applying the SEP contribution formula.
At a 25% contribution rate, $360,000 of eligible compensation produces a $90,000 mathematical result, but the $72,000 annual SEP limit caps the actual contribution.
How is a SEP IRA calculated for someone who is self-employed?
This is where many simplified SEP IRA explanations can become misleading.
A self-employed person generally cannot simply take 25% of business profit and call that the maximum SEP contribution. The IRS uses a special calculation based on net earnings from self-employment.
The calculation accounts for the deductible portion of self-employment tax and the deduction for the SEP contribution itself.
As a result, the effective maximum contribution rate for many self-employed individuals is generally lower than a simple 25% of net business profit.
For example, if a freelancer has $100,000 of business profit, it would be incorrect to automatically assume the maximum SEP contribution is $25,000. The actual amount requires the self-employed SEP calculation.
This distinction matters because a contribution that is too high can create an excess contribution problem. If you are calculating a SEP contribution for your own business, use the current IRS calculation or have a tax professional verify it.
Do SEP IRA Contributions Have to Be Made Every Year?
No. SEP contributions are generally discretionary.
A business can decide to make contributions in one year and not make them in another, subject to the terms of its SEP and applicable rules.
This flexibility can be particularly useful for businesses with variable income. A business owner may have a strong year and make a substantial contribution, while contributing less or nothing in a weaker year.
However, if the employer makes a SEP contribution for eligible employees, the contribution generally must follow the plan’s allocation formula and apply consistently to eligible participants.
What Are the Tax Benefits of a SEP IRA?
Traditional SEP contributions can provide a tax deduction to the business, subject to applicable limits. Contributions generally are not included in the employee’s gross income when made to a traditional SEP-IRA.
The money can then remain invested in the account without current taxation on investment earnings. Taxes generally become relevant when taxable distributions are taken.
This creates two important tax advantages:
- Potential tax deduction: Eligible employer contributions can generally be deductible within IRS limits.
- Tax-deferred growth: Investment earnings in a traditional SEP-IRA generally are not taxed each year as they accumulate.
The tax treatment is different for a Roth SEP IRA. SECURE 2.0 allows SEP arrangements to make contributions to Roth SEP IRAs. Roth contributions are made with after-tax treatment, so they do not receive the same upfront deduction as traditional SEP contributions.
Qualified Roth distributions can receive Roth tax treatment. Availability depends on the financial institution and plan arrangement.
When Is the SEP IRA Contribution Deadline?
A SEP can generally be established for a tax year as late as the due date of the business’s federal income tax return for that year, including extensions. Contributions can generally be made by that same deadline, including extensions.
This is useful for business owners because a SEP does not necessarily have to be established at the beginning of the calendar year.
For example, if a business files its tax return with a valid extension, the extension can generally give the business additional time to establish and fund the SEP.
The exact tax filing deadline depends on the type of business, so the contribution deadline should be coordinated with the business’s tax return.
What Is Form 5305-SEP?
Form 5305-SEP is an IRS model document that can be used to establish a SEP when the business meets the requirements for using the form.
You generally do not file Form 5305-SEP with the IRS. Instead, the employer keeps the executed document and provides the required information to eligible employees.
Form 5305-SEP cannot be used in every situation. For example, restrictions apply if the business maintains another qualified retirement plan, has certain leased employees, or falls into certain controlled-group or affiliated-service-group situations.
Businesses that cannot use the model form may need a prototype SEP or individually designed plan document.
How Do You Open a SEP IRA?
Opening a SEP generally involves these steps:
1. Confirm that a SEP fits the business
Consider whether the business wants discretionary employer contributions, whether it has eligible employees, and whether another retirement plan would better fit its needs.
2. Choose a financial institution
Banks, investment firms, and other qualified financial institutions may offer SEP-IRA arrangements. Investment choices, fees, account features, and Roth SEP availability can differ between providers.
3. Establish the SEP
The business adopts an appropriate SEP document, such as Form 5305-SEP when permitted.
4. Establish SEP-IRAs for eligible employees
Each eligible employee needs a SEP-IRA. The employee owns and controls the account.
5. Make contributions
The employer makes contributions according to the plan’s formula and applicable IRS limits.
6. Provide required information
Employers must provide eligible employees with the required plan information and contribution statements.
SEP IRA Pros and Cons
| Advantages | Disadvantages |
|---|---|
| High potential contribution limit | No standard employee salary-deferral feature |
| Simple compared with many qualified plans | Contributions for eligible employees can become expensive |
| Contributions can generally be discretionary | Employer generally must use the same contribution percentage for eligible employees |
| Useful for self-employed people | Self-employed contribution calculations are more complicated than the 25% headline |
| Can be established relatively late in the tax year | No participant loans |
| Can offer traditional or Roth SEP treatment when available | Traditional SEP distributions are generally taxable |
| Generally no annual Form 5500 filing requirement | Catch-up contributions are not permitted under a standard SEP |
SEP-IRAs also do not permit participant loans.
What Are SEP IRA Withdrawal Rules?
Money in a SEP-IRA can generally be withdrawn at any time. For a traditional SEP-IRA, taxable amounts withdrawn are generally included in income for the year of distribution.
If you withdraw money before age 59½, a 10% additional tax generally applies unless an exception applies. SEP-IRAs follow the IRA rules for this purpose.
There is no general hardship-withdrawal requirement for a SEP-IRA. In other words, you do not have to prove financial hardship before requesting an IRA distribution. That does not make early withdrawals tax-free, however.
SEP assets can also generally be rolled over to other IRAs and eligible retirement plans under the applicable rollover rules.
Does a SEP IRA Have Required Minimum Distributions?
Traditional SEP-IRAs are subject to required minimum distribution rules.
Under current rules, RMDs generally begin at age 73 for IRA owners who fall under the current age-73 rule. SECURE 2.0 also provides for the applicable age to rise to 75 for individuals who reach age 74 after 2032.
The fact that you are still working does not generally eliminate the RMD requirement for a traditional SEP-IRA. The IRS specifically includes SEP and SIMPLE IRAs among the accounts subject to IRA RMD rules.
Roth SEP IRAs have different distribution rules. The IRS treats Roth SEP IRAs under Roth IRA rules, including the rules governing Roth distributions.
SEP IRA vs. Other Retirement Accounts
The right retirement account depends heavily on whether you have employees and whether you want employee salary deferrals.
| Feature | SEP IRA | Solo 401(k) | SIMPLE IRA | Traditional IRA | Roth IRA |
|---|---|---|---|---|---|
| Designed primarily for | Self-employed and small businesses | Self-employed owner with no eligible employees | Small employers | Individuals | Individuals |
| Employer contributions | Yes | Yes | Yes | No | No |
| Employee salary deferrals | Generally no | Yes | Yes | Not applicable | Not applicable |
| 2026 standard contribution ceiling | Up to $72,000, subject to rules | Up to applicable 401(k) limits | Generally up to $17,000 employee deferral plus employer contributions | $7,500 | $7,500 |
| Catch-up contributions | No under standard SEP | Yes | Yes | Yes | Yes |
| Roth option | Available under SEP arrangements that offer it | Generally available if plan permits | Available if plan permits | Separate Roth IRA | Yes |
The contribution limits for traditional and Roth IRAs are $7,500 for 2026, with an $1,100 IRA catch-up contribution for eligible individuals age 50 or older.
SEP IRA vs. Solo 401(k)
A Solo 401(k) can be attractive for a self-employed person with no employees who wants to make both employee elective deferrals and employer contributions.
A SEP IRA is often simpler, but its standard structure does not provide the same employee salary-deferral feature.
A Solo 401(k) may therefore provide more flexibility for some self-employed people, particularly those who want to maximize contributions at different income levels or make catch-up contributions.
SEP IRA vs. Traditional IRA
A SEP IRA can allow substantially larger business-funded contributions than a regular traditional IRA.
The accounts can also coexist. Having a SEP does not automatically prevent someone from contributing to a separate traditional or Roth IRA, although the tax deductibility of a traditional IRA contribution can depend on income and retirement-plan coverage.
Employer SEP contributions also do not count against the regular IRA contribution limit.
SEP IRA vs. SIMPLE IRA
A SIMPLE IRA is designed for small employers and generally permits employee salary-reduction contributions plus employer contributions.
A SEP is different because the standard arrangement is primarily employer-funded. A SIMPLE IRA may therefore be more suitable when employees need the ability to contribute directly from their paychecks.
Is a SEP IRA Right for You?
A SEP IRA can be especially useful if you:
- Are self-employed or own a small business
- Have relatively strong or variable business income
- Want the potential for larger employer contributions
- Prefer a relatively straightforward retirement arrangement
- Have no employees or only a small number of eligible employees
- Want contributions that can generally vary from year to year
It may be less attractive if you:
- Want to make employee salary-deferral contributions
- Need catch-up contributions
- Have many eligible employees and do not want to make proportional contributions for them
- Want participant loans
- Prefer a retirement plan designed around employee contributions
The employee issue deserves special attention. If you own a business with several eligible employees, a SEP contribution that looks attractive for the owner can become expensive because the employer generally has to contribute the same percentage of compensation for eligible employees.
Frequently Asked Questions
What does SEP stand for?
SEP stands for Simplified Employee Pension.
Is a SEP IRA the same as a traditional IRA?
No. A SEP IRA uses an IRA account but operates under a SEP retirement arrangement established by an employer. SEP contributions have different limits and rules from ordinary IRA contributions.
Can employees contribute to a SEP IRA?
A standard SEP does not generally allow employees to make salary-deferral contributions like they can with a 401(k). However, an individual may make separate regular IRA contributions to an IRA, including an account associated with a SEP, when the applicable IRA rules are satisfied.
Can I have employees and a SEP IRA?
Yes. A business can have employees and maintain a SEP. The key issue is identifying eligible employees and applying the contribution rules consistently.
Can I skip a SEP contribution?
Generally, SEP contributions are discretionary, so a business can generally choose whether to make a contribution for a particular year. If it contributes, however, the contribution must follow the applicable plan rules.
The Bottom Line
A SEP IRA is a retirement arrangement built around employer contributions and is particularly useful for self-employed people and small-business owners who want the potential to save substantially more than the regular IRA limit.
For 2026, the maximum SEP contribution is generally the lesser of 25% of eligible compensation or $72,000. But self-employed owners need to use the special net-earnings calculation rather than simply multiplying business profit by 25%.
Businesses with eligible employees also need to account for the requirement to make contributions using the same percentage of compensation.
For a business with no employees, a SEP can be a straightforward way to make large retirement contributions. For a business with employees, the cost of proportional contributions should be considered alongside alternatives such as a SIMPLE IRA or 401(k).
Because contribution calculations and tax treatment can be situation-specific, especially for self-employed individuals, verify your calculation using current IRS guidance or a qualified tax professional before making a large contribution.
