S Corp SEP IRA Contribution Limits: W-2 Wages, Deadlines, and Tax Treatment

For 2026, an S Corporation can contribute the lesser of 25% of an owner-employee’s W-2 wages or $72,000 to that owner’s SEP IRA.¹ The S Corp SEP IRA contribution limit runs off W-2 wages only. Pass-through profits reported on your Schedule K-1 do not count as compensation for this purpose, no matter how large they are.² That one rule drives everything else.

Why Only W-2 Wages Count

Sole proprietors base SEP contributions on net self-employment income. S Corp owner-employees cannot. The IRS treats shareholder distributions as a return on ownership, not earned income, so they are excluded from the retirement plan calculation.² Only what runs through payroll builds your SEP ceiling.

This creates a tension unique to S Corps. Many owners deliberately keep W-2 salary low and take the rest as distributions to shrink payroll taxes. That same choice shrinks the SEP contribution ceiling in lockstep. Pay yourself $80,000 in wages and your maximum SEP contribution is $20,000. Set the salary at $150,000 and the ceiling jumps to $37,500. Whatever salary number you pick effectively sets your retirement savings cap for the year.

The IRS separately requires S Corp owners to pay themselves reasonable compensation for the services they perform. An artificially low salary invites reclassification of distributions as wages. That risk exists regardless of any retirement plan, but the SEP math is one more reason to think carefully about where the salary lands.

How the Two Limits Work Together

Every SEP contribution passes a two-part test. The amount cannot exceed 25% of the participant’s W-2 compensation, and it cannot exceed $72,000 for 2026.¹ The $72,000 figure matches the Section 415(c) annual addition limit for defined contribution plans.³ The lower of the two numbers wins.

Only the employer contributes. Employees, including owners, cannot make their own salary deferrals into a SEP IRA. The IRS also caps the amount of compensation that can enter the calculation at $360,000 for 2026, so wages above that line stop increasing the percentage figure.³

Here is how the two limits interact at common salary levels:

$100,000 W-2 salary: 25% = $25,000. Below the dollar cap, so the maximum contribution is $25,000.
$200,000 W-2 salary: 25% = $50,000. Below the dollar cap, so the maximum is $50,000.
$288,000 W-2 salary: 25% = $72,000. This is the salary at which the percentage calculation first hits the dollar ceiling.
$300,000 W-2 salary: 25% = $75,000, but the $72,000 cap applies. Maximum is $72,000.
$400,000 W-2 salary: the compensation cap of $360,000 applies, so 25% = $90,000, limited to $72,000.

To reach the full $72,000 contribution for 2026, the owner needs at least $288,000 in W-2 wages.

What You Contribute for Yourself, You Contribute for Everyone

Whatever percentage the S Corporation uses for the owner must apply to every other eligible employee’s W-2 wages. The IRS requires employer contributions to bear a uniform relationship to each participant’s compensation.⁴ A 25% contribution for the owner means a 25% contribution for every qualifying worker.

For businesses with meaningful payroll outside the owner, this is often the real cost of maxing out a SEP. An eligible employee is anyone who is at least 21 years old, has worked for the business in at least three of the last five years, and has received at least $800 in compensation for 2026.³ The plan may exclude workers covered by a union collective bargaining agreement (where retirement benefits were bargained in good faith) and nonresident aliens with no U.S.-source income.⁵ All contributions vest immediately.⁶

Deadlines for Contributions and Plan Setup

Contributions for a given tax year can be made up to the due date of the S Corporation’s federal income tax return, including extensions.⁶ For a calendar-year S Corporation, Form 1120-S is due March 15 of the following year.⁷ Filing Form 7004 grants an automatic six-month extension, pushing the deadline to September 15.⁸

A new SEP can also be established as late as that same extended deadline for the tax year it covers.⁶ An S Corp with a profitable 2026 could set up a SEP and fund it anytime before September 15, 2027, as long as the corporation files for extension.

Tax Treatment of the Contribution

The S Corporation deducts SEP contributions on Form 1120-S, Line 17, as a business expense.⁹ Traditional SEP contributions are not subject to federal income tax withholding, Social Security, Medicare, or federal unemployment taxes.⁶ A dollar in a SEP contribution is cheaper than a dollar in extra W-2 salary, because neither side pays FICA on it. The employee doesn’t report the amount as income in the year contributed; withdrawals in retirement are taxed as ordinary income.

Since 2023, the SECURE 2.0 Act has let employers designate SEP contributions as Roth. Those Roth contributions still skip FICA and FUTA, but the employee must report them as taxable income in the year they are allocated, and the custodian reports them on Form 1099-R rather than Form 5498.¹⁰ Qualified withdrawals later come out tax-free.

When a Solo 401(k) Allows More

At moderate salary levels, a SEP IRA is not the plan that lets an S Corp owner save the most. A Solo 401(k) allows both employee deferrals (up to $23,500 for 2026 for those under 50) and employer contributions of up to 25% of wages, subject to the same $72,000 combined annual addition limit.³

At $100,000 in W-2 wages, a SEP IRA tops out at $25,000. A Solo 401(k) at the same salary allows $23,500 in employee deferrals plus $25,000 in employer contributions, for $48,500 total. The gap narrows as compensation rises and closes entirely once wages reach roughly $288,000, where both plans hit the $72,000 ceiling. A Solo 401(k) also permits Roth employee deferrals, catch-up contributions for those 50 and older, and participant loans in many cases, at the cost of more administration and a Form 5500-EZ filing requirement once plan assets exceed $250,000. Once the business has non-owner employees, the SEP’s simplicity may be worth more than the 401(k)’s contribution headroom.

If You Contribute Too Much

Overcontributing triggers two separate excise taxes. The account holder owes a 6% excise tax on any excess amount for each year it remains in the account.¹¹ To avoid it, withdraw the excess and any attributable earnings before the due date of the employee’s personal return, including extensions.¹²

The S Corporation separately owes a 10% excise tax under Section 4972 on contributions that exceed the deductible limit, reported on Form 5330.¹³¹⁴ The corporation can avoid this tax by withdrawing the excess before the contribution deadline for that tax year. Left in place, the 6% tax compounds annually and can quickly outgrow the original overcontribution.

1
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
2
Internal Revenue Service. Retirement Plan FAQs Regarding Contributions – S Corporation
3
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
4
Internal Revenue Service. Contributions to Each Participant’s SEP-IRA Weren’t a Uniform Percentage of the Participant’s Compensation
5
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
6
Internal Revenue Service. Simplified Employee Pension Plan (SEP)
7
Internal Revenue Service. Starting or Ending a Business 3
8
Internal Revenue Service. Instructions for Form 7004
9
Internal Revenue Service. 2025 Instructions for Form 1120-S – U.S. Income Tax Return for an S Corporation
10
Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
11
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
12
Internal Revenue Service. Sample Article for Organizations and Employers to Use to Reach Customers
13
Office of the Law Revision Counsel. 26 U.S. Code 4972 – Tax on Nondeductible Contributions to Qualified Employer Plans
14
Internal Revenue Service. Instructions for Form 5330 (Rev. December 17, 2025)