SEP IRA Rules, 2026 Contribution Limits, and Tax Treatment

A SEP IRA is a retirement plan that lets a business owner or self-employed person put money into an IRA for themselves and for each eligible employee, deduct the full amount as a business expense, and skip almost all of the administrative work that comes with a 401(k). The SEP IRA rules for 2026 cap employer contributions at the lesser of 25% of compensation or $72,000 per person, require the same contribution percentage for every eligible employee, and give you until your business tax return due date, including extensions, to both set up the plan and fund it. Employees do not contribute their own salary; the money comes entirely from the employer side.¹

Who Can Use a SEP IRA

Any business can establish one, regardless of size or structure. Sole proprietorships, partnerships, S-corporations, C-corporations, and LLCs all qualify. Freelancers and independent contractors can set one up too, acting as both the employer and the employee for plan purposes.¹

The plan is at its most useful when the owner is the only participant, or nearly so. A solo consultant can put a large slice of profit into a SEP IRA with almost no paperwork. Once you have employees, the calculation changes, because whatever percentage of pay you contribute for yourself, you must contribute for each eligible worker.

Which Employees You Must Cover

You cannot pick and choose. If you have employees, the plan must include every worker who meets all three of these tests:²

At least 21 years old.
Worked for you during at least three of the last five years.
Earned more than a minimum dollar amount from your business during the year. This threshold is adjusted annually for inflation and has been $750 in recent years; the IRS publishes the current figure each fall.³

You can loosen these minimums but not tighten them. Including workers after one year of service is fine; requiring four years is not.⁴

Contribution Limits and How They Work in 2026

Only the employer contributes. Employees cannot defer their own salary into the plan, and that single fact is the biggest structural difference between a SEP IRA and a 401(k).⁵

For 2026, the contribution to each employee’s SEP IRA is capped at the lesser of 25% of compensation or $72,000. Only compensation up to $360,000 counts toward the calculation.³ An employee earning $400,000 has the 25% applied only to the first $360,000, and then hits the $72,000 hard ceiling anyway.⁵

The percentage you choose applies uniformly. If you contribute 15% of your own pay, you contribute 15% for every eligible worker. All contributions must be made in cash, not in property or other assets.

You are not locked into contributing every year. In a lean year, you can skip contributions entirely. In a strong year, you can go up to the maximum. That year-to-year flexibility is one of the plan’s strongest features.

The Self-Employed Calculation

If you’re self-employed, your effective contribution rate is lower than 25% because of a circular math problem: the SEP contribution reduces the net earnings figure the 25% is calculated on. After accounting for that adjustment and the deduction for half of self-employment tax, the maximum works out to roughly 20% of net self-employment earnings. The IRS provides worksheets in Publication 560, and most tax software handles the math automatically.⁶

Setting Up the Plan

Setup has three parts: adopt a written agreement, open accounts for eligible employees, and give those employees written information about the plan.

Most employers use IRS Form 5305-SEP, a model document that satisfies all the required terms. You fill it out, keep it in your records, and do not file it with the IRS.⁷ A prototype plan from a financial institution or a custom-drafted plan is possible if you need terms the model form does not cover, but most small businesses never need to go that route. Each eligible employee needs a SEP IRA account at a bank, brokerage, or other custodian, and the employer deposits contributions directly into those accounts. Form 5305-SEP includes an employee information section that meets the notification requirement.

Deadline to Establish and Fund the Plan

You can both open a new plan and make contributions for a given tax year up until the due date of your business income tax return, including extensions.¹ A sole proprietor filing on a calendar year who requests an extension has until October 15 to set up and fund a SEP IRA for the previous tax year. You can wait until you know exactly how the year went before committing.

No Annual Filing on Your End

Unlike a 401(k), a SEP IRA generally does not require the employer to file Form 5500 or any other annual return with the IRS.¹ The account custodian handles the yearly reporting to the IRS.

Roth SEP Contributions

Starting in 2023, the SECURE 2.0 Act gave employers the option to let employees designate SEP contributions as Roth rather than traditional. Employers are not required to offer this election. When an employee chooses Roth treatment, the contribution is included in taxable wages for the year and reported on the W-2, but qualified withdrawals in retirement are tax-free.⁸ Whether the Roth option is actually available depends on your custodian; not all institutions have built the infrastructure to support it. Check before assuming.

Tax Treatment

For traditional (non-Roth) contributions, the tax treatment works on three levels. The employer deducts contributions as a business expense.⁹ Employees do not include the contribution in gross income; the money goes in pre-tax. Investment earnings then grow tax-deferred, with tax due only on withdrawal.

Effect on Personal IRA Deductions

One catch trips people up. Participating in a SEP IRA counts as being covered by a workplace retirement plan, which can reduce or eliminate your deduction for contributions to a separate personal traditional IRA. For 2026, the deduction phases out between $81,000 and $91,000 of modified adjusted gross income for single filers covered by a workplace plan, and between $129,000 and $149,000 for married couples filing jointly where the contributing spouse is covered.¹⁰ You can still make non-deductible traditional IRA contributions or contribute to a Roth IRA, subject to Roth income limits.⁴

Withdrawals, Penalties, and RMDs

Funds in a SEP IRA belong entirely to the employee from day one. All contributions are immediately 100% vested, and the employer cannot claw them back or impose a vesting schedule.¹¹ Employees can withdraw the money at any time, but withdrawals before age 59½ carry tax consequences.

Any withdrawal is taxed as ordinary income in the year taken. Withdrawals before age 59½ also owe a 10% additional tax on top of regular income tax.¹

Exceptions to the Early Withdrawal Penalty

Several situations let you avoid the 10% penalty on withdrawals before 59½, though you still owe ordinary income tax:¹²

Total and permanent disability of the account owner.
Death, for beneficiaries who inherit the account.
A series of substantially equal periodic payments calculated based on life expectancy.
Unreimbursed medical expenses exceeding 7.5% of adjusted gross income.
Health insurance premiums paid while unemployed for at least 12 weeks.
Higher education expenses for you, your spouse, or dependents.
First-time home purchase, up to $10,000.
Qualified birth or adoption expenses, up to $5,000 per child.
IRS levy against the account.
Federally declared disaster, up to $22,000.

You cannot borrow from a SEP IRA. IRAs of all types do not permit participant loans. The only way to move funds temporarily is a 60-day rollover, which becomes a taxable distribution if you miss the deadline.

Required Minimum Distributions

You cannot leave money in a SEP IRA indefinitely. Required minimum distributions start at age 73, or age 75 if you were born in 1960 or later.¹³ Missing an RMD triggers an excise tax on the amount that should have been withdrawn.

Rollovers

SEP IRA funds are portable. You can roll them into:¹⁴

A traditional IRA, tax-free, subject to the one-rollover-per-12-months rule.
A Roth IRA, with the rolled amount included in taxable income for the year.
A 401(k) or 403(b), if the receiving plan accepts incoming rollovers.
Another SEP IRA, subject to the one-rollover-per-year rule.

Rolling a SEP IRA into a Roth IRA is a common strategy for self-employed people in years when income is unusually low: pay tax on the conversion at the lower rate, then enjoy tax-free growth going forward.

How It Compares With a Solo 401(k)

Self-employed people with no employees (other than a spouse) often compare a SEP IRA against a solo 401(k). Both share the same $72,000 overall contribution ceiling in 2026, but the path to that ceiling differs.

A SEP IRA’s contribution is entirely from the employer side, capped at roughly 20% of net self-employment income after adjustments. A solo 401(k) splits contributions into an employee salary deferral (up to $24,500 in 2026, plus catch-up if you are 50 or older) and an employer profit-sharing piece. Because the deferral does not count against the 25% employer limit, a solo 401(k) often lets you contribute more at the same income level.¹⁰ The solo 401(k) also allows participant loans and built-in Roth deferrals. The trade-off is paperwork: once plan assets exceed $250,000, you must file Form 5500-EZ each year. A SEP IRA never triggers that filing.

Fixing Contribution Mistakes

The two most common SEP IRA errors are contributing more than the allowed amount and using the wrong definition of compensation.

Excess contributions left in the employee’s account past the tax return due date, including extensions, trigger a 6% excise tax each year until corrected. If you catch the error before that deadline, the employee can withdraw the excess plus any earnings on it and avoid the penalty.⁴ The employer may also face a 10% excise tax on excess nondeductible contributions.

For broader operational errors, the IRS offers three correction paths depending on how the problem is discovered: self-correction for minor errors caught quickly, a voluntary correction program for errors caught before an audit, and a closing agreement program for issues found during an examination. Fixing errors early is always cheaper than waiting for the IRS to find them.¹⁵

1
Internal Revenue Service. Simplified Employee Pension Plan (SEP)
2
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
3
Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
4
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
5
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
6
Internal Revenue Service. Calculating Your Own Retirement Plan Contribution and Deduction
7
Internal Revenue Service. Form 5305-SEP – Simplified Employee Pension Individual Retirement Accounts Contribution Agreement
8
Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
9
U.S. Department of Labor. SEP Retirement Plans for Small Businesses
10
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
11
Internal Revenue Service. Retirement Topics – Vesting
12
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
13
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
14
Internal Revenue Service. Rollover Chart
15
Internal Revenue Service. SEP Plan Fix-It Guide – Contributions to Participants SEP-IRAs Were Miscalculated Because the Wrong Definition of Compensation Was Used