A SEP IRA (simplified employee pension) is a retirement plan a business owner sets up for themself and any eligible employees, funded entirely by employer contributions to traditional IRAs. For 2026, contributions can’t exceed the lesser of 25% of compensation or $72,000. A self-employed owner calculates their own contribution from net earnings after half of self-employment tax, which makes the effective rate 20%. You can open and fund a SEP for 2026 as late as your 2026 return’s due date, including extensions.
To size your own number, start with the SEP IRA calculator, then read the rules below that change the answer.
What is a SEP IRA?
The full name is simplified employee pension individual retirement account. Under the plan, your business deposits money into a traditional IRA in each participant’s name, including your own. There is no plan trust and no employee deferral option. Every dollar is an employer contribution, and every dollar is 100% vested the day it goes in.
You set one up with a written agreement. Most small businesses adopt the IRS model plan on Form 5305-SEP, keep it on file, and never send it to the IRS. Publication 560 notes that using Form 5305-SEP usually relieves the employer of annual Form 5500 reporting.
Contributions are flexible. You can put in 25% one year and nothing the next, as long as whatever you put in follows the plan’s allocation formula.
Who can open a SEP IRA?
Any business can: a sole proprietor with Schedule C income, a partnership, an LLC, an S corporation, or a C corporation. Freelance and consulting income counts if it is self-employment income, even when you also hold a W-2 job.
What is the SEP IRA contribution limit for 2026?
The IRS 2026 cost-of-living table sets these figures:
| 2026 SEP limit | Amount |
|---|---|
| Max contribution | 25% of pay, up to $72,000 |
| Max compensation counted | $360,000 |
| Minimum pay for eligibility | $800 |
| Catch-up contribution | Not available |
The IRS SEP contribution limits page confirms the 25% or $72,000 limit for 2026 and states that SEPs do not allow elective deferrals or catch-ups. The $72,000 cap applies to the SEP; it does not reduce the $24,500 employee deferral limit you might use in a 401(k) at another job.
How do you calculate a SEP contribution if you are self-employed?
Your contribution and your “compensation” depend on each other: the contribution reduces the net earnings it is measured against. Publication 560 solves this with a reduced rate. For a plan that calls for 25%, a self-employed owner uses 20% (0.25 ÷ 1.25) of net earnings after subtracting the deduction for half of self-employment tax. The IRS walks through it on its self-employed contribution page.
Example: $150,000 of Schedule C profit in 2026
Assume a sole proprietor with no employees, no W-2 wages, and $150,000 of net profit. Self-employment tax is 15.3% of 92.35% of profit here, because $138,525 sits below the 2026 Social Security wage base of $184,500.
| Step | Amount |
|---|---|
| Schedule C net profit | $150,000 |
| SE earnings (× 92.35%) | $138,525 |
| SE tax (× 15.3%) | $21,194 |
| Half of SE tax deducted | −$10,597 |
| Net earnings for the plan | $139,403 |
| Max SEP contribution (× 20%) | $27,881 |
Check it against the 25% rule: $139,403 minus the $27,881 contribution leaves $111,522 of compensation, and 25% of that is $27,881.
Under this math, you reach the $72,000 cap at about $360,000 of net earnings after the half-SE-tax deduction. Above that, extra profit adds nothing to a SEP.
Do you have to contribute for employees?
Yes, if they are eligible. Under Publication 560, you must cover any employee who:
- has reached age 21,
- worked for you in at least 3 of the last 5 years, and
- received at least $800 in compensation from you for 2026.
Your plan can use looser rules, such as no service requirement, but not stricter ones. Union employees whose retirement benefits were bargained for and certain nonresident aliens can be excluded.
Most SEPs allocate the same percentage of pay to everyone. If you fund 25% for yourself (20% of net earnings, as computed above), an eligible employee earning $60,000 gets $15,000. That is the trade-off the IRS lists as the plan’s main disadvantage: you can’t fund your own account without funding theirs at the same rate.
When is the SEP IRA deadline for 2026?
Both deadlines run to the due date of the business’s tax return, including extensions:
| Business type | 2026 deadline | With extension |
|---|---|---|
| Sole proprietor (Schedule C) | April 15, 2027 | October 15, 2027 |
| S corporation (Form 1120-S) | March 15, 2027 | September 15, 2027 |
You can open the SEP and deposit the money after the year ends. That makes a SEP useful when you finish a profitable year and only then learn the number. A Solo 401(k) has tighter rules for first-year employee deferrals; see Solo 401(k) vs SEP IRA.
Can you make Roth SEP contributions?
Yes, if your SEP offers it. Section 601 of SECURE 2.0 allows SEP contributions to go to a Roth IRA for tax years beginning after 2022. IRS Notice 2024-2 fills in the mechanics:
- The employer is not required to offer a Roth option, and the employee must elect it before the contribution is made.
- A Roth SEP contribution is taxable income for the year it lands in the Roth IRA, even if it counts as a prior-year contribution. A 2026 contribution deposited in March 2027 is 2027 income.
- It is reported on Form 1099-R, coded the same way as a conversion.
- It is not subject to income tax withholding, so you may need to raise estimated tax payments.
Custodian support varies. Confirm the provider can accept Roth SEP money before you plan around it.
How does a SEP IRA affect a backdoor Roth?
It can make one mostly taxable. The pro-rata rule on Form 8606 combines your traditional, SEP, and SIMPLE IRA balances at December 31 of the conversion year. A $100,000 SEP IRA balance plus a $7,500 nondeductible contribution means only about 7% of a $7,500 conversion is tax-free. The backdoor Roth guide shows the full calculation.
If you plan to do a backdoor Roth every year, a Solo 401(k) is usually the better shell for self-employed savings, because 401(k) balances stay outside the IRA calculation.
Is a SEP IRA or a Solo 401(k) better?
It depends on income and on whether you have employees. A brief comparison for a self-employed owner with no employees in 2026:
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Who can use it | Any business, staff or not | Owner, no employees but a spouse |
| Employer contribution | 20% of net SE earnings | Same 20% |
| Employee deferral | None | Up to $24,500 |
| Catch-up at 50+ | None | $8,000 ($11,250 at 60 to 63) |
| Backdoor Roth pro-rata | Counts | Doesn’t count |
| Annual filing | Usually none | Form 5500-EZ above $250,000 |
| Late setup for prior year | Extended due date | Employer part by extended date, deferrals by original |
At $150,000 of net earnings after the half-SE-tax deduction, the SEP caps out at $30,000 and a Solo 401(k) allows $54,500 before catch-ups. The Solo 401(k) vs SEP IRA comparison runs three income levels and the W-2 side-gig case.
How does a SEP work for S corporation owners?
The contribution is based on your W-2 wages from the S corporation, not your share of profit. Publication 560 says net earnings from self-employment don’t include income passed through to S corporation shareholders. At $100,000 of W-2 salary, the maximum SEP contribution is $25,000 (25% of wages, no 20% adjustment because you are an employee of the corporation). Distributions add nothing.
That ties retirement savings to the reasonable-salary decision. A higher salary raises the SEP limit but also raises payroll tax. The corporation deducts the contribution on Form 1120-S.
SEP IRA pros and cons
Pros
- Setup takes one form, and there is usually no annual IRS filing.
- You decide each year whether to contribute and how much.
- You can open and fund it after year-end, up to the extended due date.
- It works for any business size.
Cons
- No employee deferral and no catch-ups, so it trails a Solo 401(k) below about $360,000 of net earnings.
- Eligible employees get the same percentage you do.
- The balance counts against a backdoor Roth.
- No plan loans; it is an IRA.
Where to start
Run your 2026 number through the SEP IRA calculator, then compare it with a Solo 401(k) before you pick. If you own an S corporation, set the salary first; the SEP limit follows it.
Business owners have more moving parts than a single plan choice: entity type, salary, quarterly estimates, and whether this year’s profit should go to retirement or stay in the business. The business owners page covers how Nino works on those decisions. Nino Advisor plans pair you with a CPA and CFP and include federal and state tax filing; Premier, at $12,000 a year, adds business and personal filing together. Software plans start at $20 a month.