How to Set Up a SEP IRA: Steps, Deadlines, and 2026 Limits

Setting up a SEP IRA takes three steps: adopt a written plan document, open a SEP-IRA account at a financial institution for each eligible employee, and deposit your contributions by your business’s tax-filing deadline. For 2026, contributions cannot exceed the lesser of 25 percent of each employee’s compensation or $72,000 per person.¹ The whole process can be done in an afternoon, and unlike a 401(k), there is no annual IRS filing requirement.

Any business structure qualifies: sole proprietorship, partnership, LLC, S-corp, or C-corp. Freelancers and independent contractors with no employees can set one up for themselves. The number of employees does not matter.

Step 1: Adopt a Written Plan Document

Every SEP starts with a written plan agreement. You have two options.

IRS Form 5305-SEP

Most small businesses use Form 5305-SEP, a free IRS template that doubles as your plan agreement and contribution formula.² Fill in the business name, effective date, eligibility criteria, and the contribution allocation method, then keep it in your records. You do not file it with the IRS.

One important restriction: you cannot use Form 5305-SEP if your business already maintains another qualified retirement plan, such as a 401(k) or defined benefit plan. Having another SEP is fine. Any other qualified plan disqualifies you from the model form, even if you made no contributions to it during the year.²

Prototype Plans

Banks, brokerages, and insurance companies offer their own pre-approved SEP documents. These prototype plans serve the same purpose as Form 5305-SEP but may contain language tied to the institution’s investment products. If your business runs a more complex setup, such as multiple qualified plans, a prototype or individually designed document is required.

Step 2: Identify Who Must Be Covered

Federal law requires you to include every employee who meets all three of these criteria:³

At least 21 years old.
Worked for you during at least three of the last five years.
Earned at least the minimum compensation threshold. For 2026, that amount is $800, adjusted from $750 in prior years.

You can set less restrictive rules (a lower age, fewer years of service, a lower compensation floor) but you cannot make them stricter. Part-time and seasonal workers who meet the criteria have to be included.⁴

Two categories of otherwise eligible workers can be excluded: union employees whose retirement benefits were negotiated in good faith under a collective bargaining agreement, and nonresident aliens who earned no U.S.-source income from your business.⁴

Whatever contribution percentage you pick in a given year must apply equally to every eligible employee, including yourself.

Step 3: Notify Eligible Employees

Once you adopt the plan, you have to tell eligible employees about it. If you use Form 5305-SEP, give each participant a copy of the completed form along with its instructions, both when the plan is first created and whenever a new employee becomes eligible.⁵

Two ongoing notices apply after that. You must notify each participant in writing of the contributions made to their account after the end of each calendar year.⁵ If you amend the plan, you have 30 days to give participants a copy of the amendment and a written explanation of its effects.² Skipping these notices can put the plan out of IRS compliance.

Step 4: Open the SEP-IRA Accounts and Fund Them

With the plan document signed and employees notified, open a SEP-IRA account at a bank, brokerage, or insurance company for each eligible employee. Most major brokerages charge nothing to open or maintain these accounts. Schwab, Fidelity, and Vanguard all offer $0 account fees, though fund expenses and trading commissions may still apply. Each account is a separate traditional IRA in the employee’s own name, and the employee chooses investments from the options the institution offers.

You deposit contributions directly into each employee’s account. The money is immediately and permanently theirs. SEP IRA contributions are 100 percent vested from day one.⁶ An employee who leaves the company the day after a contribution posts still owns every dollar.

Setup and Contribution Deadlines

You can establish a SEP for a given tax year as late as the due date of your business’s income tax return for that year, including extensions.⁷ For a sole proprietor or single-member LLC on a calendar year, that means April 15, or October 15 with an automatic six-month extension.⁸ Partnerships and S-corps have a March 15 return date, extended to September 15. The contribution deadline follows the same schedule as the setup deadline.

This late-establishment rule is one of the plan’s biggest practical advantages. If you’re approaching your filing deadline and want to shelter more income, you can create the plan and fund it in a single sitting, retroactively reducing the prior year’s taxable income.

Contribution Limits for 2026

Employer contributions to each employee’s SEP-IRA cannot exceed the lesser of 25 percent of that employee’s compensation or $72,000.¹ Only the first $360,000 of each employee’s compensation counts toward the calculation.⁹ These limits are adjusted annually for inflation.

Contributions are deductible as a business expense, and the money grows tax-deferred until withdrawal.⁸ You are not locked into a fixed amount each year. You can contribute generously in a strong year, cut the percentage back in a lean one, or skip contributions entirely. Whatever you pick must apply uniformly to every eligible employee.

How Self-Employed Owners Calculate Their Own Contribution

This is where most people trip up. If you have W-2 employees, their contribution is simple: pick a percentage up to 25 percent and apply it to their compensation. Your own contribution as a self-employed owner uses a different formula that produces a lower effective rate.⁹

The reason is circular math. Your SEP contribution is deducted from your income, so the compensation base shrinks by the amount of the contribution itself. To solve for this, the IRS requires self-employed individuals to use a reduced rate. At the maximum 25 percent plan rate, the reduced self-employed rate works out to 20 percent (0.25 ÷ 1.25 = 0.20). You also subtract the deductible portion of your self-employment tax from net earnings before applying that rate.¹⁰

A simplified example: Schedule C net profit of $150,000 with deductible self-employment tax of $10,597 leaves net self-employment earnings of $139,403. At the 20 percent reduced rate, the maximum SEP contribution is roughly $27,881, not the $37,500 you would get by naively multiplying $150,000 by 25 percent. Publication 560 contains a “Deduction Worksheet for Self-Employed” that walks through each step.⁹

Ongoing Responsibilities After Setup

A SEP IRA is deliberately low-maintenance, but a few tasks recur every year you make a contribution. Verify that every employee who meets the eligibility rules is included and receiving the same contribution percentage. Add newly eligible employees as they cross the service and compensation thresholds. Send the written contribution notice after year-end.

If you contribute more than the legal limit to any employee’s account, the excess is subject to a 6 percent excise tax for each year it stays in the IRA. Correct an overcontribution by withdrawing the excess and any earnings on it before the employee’s tax filing deadline.¹¹ Keep clean records of each year’s contribution formula, the employees covered, and the amounts deposited.

When a SEP IRA Isn’t the Right Plan

A SEP IRA only accepts employer contributions. Employees cannot make their own salary deferrals into a SEP, and there is no Roth option, no participant loan feature, and no hardship distribution mechanism. If you are self-employed with no employees other than a spouse and want higher deferrals, Roth treatment, or the ability to borrow against your balance, a Solo 401(k) may fit better. It allows an employee deferral of up to $23,500 for 2025 on top of the same 25 percent employer contribution, for a combined ceiling of $72,000 in 2026.¹² The tradeoff is paperwork: once Solo 401(k) plan assets exceed $250,000, you must file Form 5500-EZ each year. A SEP IRA has no annual filing requirement at any asset level.

1
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
2
Internal Revenue Service. Simplified Employee Pension Plan SEP
3
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
4
Internal Revenue Service. SEP Plan Fix-It Guide – Eligible Employees Were Excluded From Participating
5
eCFR. 29 CFR 2520.104-48 – IRS Form 5305-SEP
6
Internal Revenue Service. Retirement Topics – Vesting
7
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
8
U.S. Department of Labor. SEP Retirement Plans For Small Businesses
9
Internal Revenue Service. Publication 560 – Retirement Plans for Small Business
10
Internal Revenue Service. Calculating Your Own Retirement Plan Contribution and Deduction
11
Internal Revenue Service. SEP Plan Fix-It Guide – Contributions to the SEP-IRA Exceeded the Maximum Legal Limits
12
Internal Revenue Service. Retirement Plans for Self-Employed People