SEP IRA: Contribution Limits, Deadlines, and Eligibility

A Simplified Employee Pension IRA lets a business owner make tax-deductible retirement contributions for themselves and their employees. The core rules are straightforward. For 2026, the employer can contribute up to 25% of each eligible employee’s compensation, capped at $72,000 per person.¹ Only the employer funds a SEP IRA; employees cannot add their own money. Whatever percentage the owner picks must go to every eligible employee, and every dollar vests immediately.² Those two rules — employer-only funding and a uniform percentage — shape almost every decision that follows.

2026 Contribution Limits

For each participant, the employer’s contribution cannot exceed the lesser of 25% of compensation or $72,000.¹ Only the first $360,000 of an employee’s annual pay counts toward the calculation.³ The dollar ceiling almost always kicks in before the compensation cap does.

The uniform-percentage rule is the trade-off. You cannot give yourself 25% and the rest of your staff 10%. Whatever rate you pick applies to everyone who qualifies. The more eligible workers you have, the more expensive it gets to fund your own account at a meaningful level.

SEP IRAs do not allow catch-up contributions for participants age 50 and older, which is one thing they lack compared to SIMPLE IRAs and Solo 401(k)s.²

If You Are Self-Employed

Self-employed contributors cannot simply take 25% of Schedule C profit. The contribution itself reduces the compensation base, so the math is circular. The short version: start with net self-employment income, subtract half of your self-employment tax, then apply an effective rate of roughly 20% (not 25%) to that reduced figure.⁴ The result matches the 25% cap that applies to W-2 employees.

Excess Contributions

Getting the math wrong is costly. Contributions above the statutory limit trigger a 6% excise tax that applies every year the excess remains in the account.⁵ Withdrawing the excess plus attributable earnings before your tax filing deadline stops the penalty.

Who Qualifies as an Eligible Employee

The tax code sets a floor for eligibility. You can be more generous, but you cannot be more restrictive. To be included, an employee must meet all three of these tests:

Be at least 21 years old.
Have worked for the business during at least three of the last five years.
Have earned at least $800 from the employer during the current year.³

The $800 compensation threshold is the 2026 figure, up from $750 in prior years, and it adjusts periodically for inflation.³ An employer can loosen any of these criteria — allowing new hires to participate immediately, for instance — as long as the plan document says so.

Two categories of workers can be excluded even if they otherwise qualify: employees covered by a union collective bargaining agreement, and nonresident aliens with no U.S.-source income from the employer.⁶ Everyone else who clears the age, service, and pay thresholds must be included.

If you own or control more than one business, controlled group and affiliated service group rules treat all employees across those entities as if they worked for a single employer. You cannot set up a SEP at one company while ignoring eligible workers at another.⁷

When Contributions Are Due

SEP contributions for a given tax year must be deposited by the due date of the business’s federal income tax return, including extensions.² For most sole proprietors and single-member LLCs on a calendar year, that means April 15, or as late as October 15 with an extension. This lets you look at actual profit before deciding how much to put in.

Miss the deadline without an extension and you lose the deduction for that year. The money can still be deposited and deducted the following year, but the tax benefit for the intended year is gone.²

How a SEP IRA Compares to Other Small Business Plans

Whether a SEP is the right plan depends on whether you have employees and how much you want to save.

SEP IRA. Employer-funded only. Works for any business size. High contribution ceiling of $72,000 for 2026, but every eligible employee gets the same percentage. No catch-up contributions.²
SIMPLE IRA. Available to businesses with 100 or fewer employees. Both employers and employees contribute. Employee elective deferrals are capped at $17,000 for 2026, with catch-up contributions available for those 50 and older. Overall limit is much lower than a SEP.
Solo 401(k). Available only to owners with no employees (other than a spouse). Allows both employer and employee contributions, so total savings can reach $72,000 for 2026, or more with catch-up contributions. Offers a Roth option that SEP IRAs do not.

For a solo operator, the Solo 401(k) often wins at lower income levels because you contribute in both roles. A SEP catches up at higher incomes, where the 25% employer share alone hits the cap. For businesses with staff, the SEP is simple to run, but the uniform-percentage rule makes it expensive when the owner wants to contribute heavily. Every dollar you put in for yourself requires a proportional dollar for each eligible employee.

Withdrawal Rules

Money in a SEP IRA grows tax-deferred, and every dollar withdrawn is taxed as ordinary income in the year you take it.⁸ There is no capital gains rate. Distributions stack on top of your other income at your marginal rate.

Withdrawals before age 59½ generally trigger a 10% additional tax on top of ordinary income tax.⁹ The 10% penalty is waived (though income tax still applies) for:

Total and permanent disability.
Distributions to a beneficiary after the account owner’s death.
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
Health insurance premiums during a period of unemployment.
Qualified higher education costs for you or a family member.
A first-time home purchase, up to $10,000 over your lifetime.

Starting at age 73, account owners must take required minimum distributions each year. The first RMD is due by April 1 of the year after you turn 73; all subsequent distributions are due by December 31.¹⁰ Delaying the first distribution to April 1 means taking two in the same calendar year, which can push you into a higher tax bracket.

The Most Common Mistake

Skipping an eligible employee is the SEP error the IRS finds most often. When it happens, the fix is a corrective contribution equal to the percentage other employees received, plus an adjustment for missed earnings.¹¹ You cannot reduce other employees’ balances to offset it. The cost comes entirely out of the employer’s pocket, which is why nailing eligibility from the start is worth the up-front attention.

1
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
2
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
3
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted
4
Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
5
Internal Revenue Service. IRA Excess Contributions
6
Office of the Law Revision Counsel. 26 US Code 408 – Individual Retirement Accounts
7
Internal Revenue Service. SEP Plan Fix-It Guide – SEP Plan Overview
8
Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions (Withdrawals)
9
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
10
Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
11
Internal Revenue Service. SEP Plan Fix-It Guide – Eligible Employees Were Excluded From Participating