SEP IRA: Rules, Contribution Limits, and Eligibility

A SEP IRA is a retirement plan any business owner can use to fund tax-deferred individual retirement accounts for themselves and their employees, with a 2026 contribution ceiling of $72,000 per person. The employer makes all the contributions directly into each person’s IRA. There are no employee payroll deductions, no annual filing with the IRS, and no obligation to contribute in any given year. That mix of high limits and light paperwork is why the plan remains popular with freelancers, sole proprietors, and small businesses that want to skip the administrative weight of a 401(k).

Who Can Open One

Any business structure qualifies. Sole proprietors, partnerships, LLCs, S-corps, C-corps, and independent contractors filing on Schedule C can all establish a SEP IRA.¹ There is no minimum or maximum business size. A one-person freelance operation and a company with 50 employees both play by the same rules.

One boundary to know up front: employees cannot contribute their own money. No salary deferrals, no catch-up contributions. The employer is the only one funding the accounts.² If you want employees to defer part of their paycheck into a retirement plan, a SEP is the wrong tool.

Which Employees You Have to Cover

If you have staff, you cannot limit the plan to yourself. Federal rules set a ceiling on the barriers you can impose. An employee must be included once they meet all three thresholds:

At least 21 years old
Worked for you in at least three of the last five years
Earned at least $800 from your business during the year (for 2026)

The $800 compensation floor is up from $750 in prior years and adjusts periodically for inflation.3 You can set your own requirements lower, such as allowing participation at age 18 or after one year of service, but you can never set them higher.¹

Every dollar you put in belongs to the employee immediately. There is no vesting schedule, no cliff, no phase-in. The IRS is explicit: contributions are always 100% vested.¹ Once money lands in the account, you cannot claw it back if the employee quits the next week. Employees also control how the funds are invested within the options their IRA custodian offers.

How Much You Can Contribute in 2026

The maximum for each employee is the lesser of 25% of their compensation or $72,000 for the 2026 tax year.⁴ Only the first $360,000 of each employee’s pay counts when calculating the percentage.³ So even if someone earns $500,000, you calculate 25% of $360,000, which would produce $90,000, and then the $72,000 hard ceiling becomes the binding limit.

The uniform percentage rule is where employers most often trip up. If you contribute 15% of pay for yourself, every eligible employee gets 15% of their pay too. You cannot give yourself a larger percentage than your staff. This equal-treatment rule is baked into the statute and there is no workaround.⁵

Self-Employed Contribution Math

If you are self-employed, the calculation gets circular. You reduce net self-employment income by the deductible half of your self-employment tax before applying the contribution percentage. That reduction, combined with the fact that your own contribution further reduces the compensation base, drops the effective maximum rate to roughly 20% of net self-employment earnings rather than 25%.⁶ The IRS provides rate tables and a worksheet in Publication 560 to walk through the numbers.

When Contributions Are Due

Contributions are entirely discretionary year to year. You can fund the full percentage one year, skip the next, and contribute 10% the year after. Whatever percentage you pick in a given year applies equally to all eligible employees.

The deadline is your business tax filing due date, including extensions.⁷ For most sole proprietors that is April 15, or October 15 with an extension. Miss the window and you lose the deduction for that year.

Setting Up the Plan

Setup requires three things: a written agreement, a financial institution to hold the IRAs, and communication to your employees.

The simplest written agreement is IRS Form 5305-SEP, which serves as a model plan document.⁸ You fill in your business name, specify your eligibility requirements within the federal limits, and sign it. Many brokerages and banks offer their own prototype documents that do the same job.

You never file Form 5305-SEP with the IRS or any other agency.⁸ Keep it in your business records. There is also no annual Form 5500 filing for a SEP, which is one of its main administrative advantages over a 401(k).

Once the agreement is signed, each eligible employee needs an IRA opened at the financial institution you have selected. Every eligible employee must receive a copy of the signed agreement and a disclosure statement explaining the plan’s terms and tax treatment.¹ Retain the signed adoption agreement, contribution records, and employee communications for the life of the plan.⁹

The Roth SEP Option

Starting in 2023, the SECURE 2.0 Act allowed employer contributions to a SEP IRA to be designated as Roth contributions. Under Section 604, plans can let employees treat employer contributions as after-tax Roth amounts rather than traditional pre-tax dollars.¹⁰ The contribution is included in the employee’s taxable income for the year it is made, but qualified withdrawals in retirement come out tax-free.

The plan has to offer this feature; it does not happen automatically. Employer Roth contributions to a SEP are not subject to income tax withholding, Social Security, or Medicare tax at the time of contribution, but the employee still owes income tax on the amount.¹⁰ Not every IRA custodian supports the feature yet, so confirm before amending your plan.

Getting Money Out

SEP IRA withdrawals follow the same rules as traditional IRA withdrawals. Every distribution counts as ordinary income for federal tax purposes.

Pulling money out before age 59½ triggers a 10% additional tax on top of regular income tax.¹¹ Several exceptions waive the penalty:

Total and permanent disability as defined by the IRS
A series of substantially equal payments calculated on your life expectancy
Unreimbursed medical costs exceeding a certain percentage of adjusted gross income
One emergency personal expense distribution per year up to $1,000, added by SECURE 2.0
Up to $10,000 (or 50% of the account if less) for victims of spousal or domestic partner abuse, added by SECURE 2.0
Up to $22,000 for qualified individuals suffering economic loss from a federally declared disaster

The emergency and domestic abuse exceptions took effect for distributions after December 31, 2023.¹¹

On the other end, required minimum distributions start by April 1 of the year after you turn 73.¹² After that first distribution, later ones are due by December 31 each year. Failing to take an RMD results in an excise tax on the amount you should have withdrawn.

Rollovers

Because contributions vest immediately, employees who leave a job keep everything. The account is already an IRA the employee owns, so there is no cash-out request to make.

SEP IRA funds can be rolled into other account types:¹³

A traditional IRA, with no tax consequences on a direct rollover, limited to one rollover per 12-month period
A 401(k) or other qualified plan, if the receiving plan accepts rollovers
A Roth IRA, though the rolled amount counts as taxable income in the year of conversion

SEP IRA vs. Solo 401(k)

Self-employed people without staff often choose between a SEP IRA and a solo 401(k). Both share the same 2026 ceiling of $72,000, but they get there differently.

A solo 401(k) lets you contribute as both the employee, up to $23,500 in salary deferrals for 2026, and the employer, up to 25% of compensation. That dual-source structure often hits higher totals at lower income levels than a SEP, which relies only on the 25% employer piece. For a self-employed person earning $100,000, the solo 401(k) usually allows a significantly larger total contribution.

Other differences worth weighing:

Solo 401(k) allows employee salary deferrals; SEP does not
Solo 401(k) allows direct Roth employee contributions; SEP has Roth only through employer designation under SECURE 2.0
Solo 401(k) can allow participant loans; SEP cannot
Solo 401(k) requires Form 5500-EZ once assets exceed $250,000; SEP has no annual filing
Solo 401(k) is limited to the business owner and spouse; SEP works for any size workforce

If simplicity matters most and you have employees, the SEP wins. If you want to maximize contributions on moderate income or want Roth salary deferrals, the solo 401(k) is usually the better tool.

Fixing Common Mistakes

The two errors the IRS sees most often are leaving out an eligible employee and contributing over the legal limit. Both are fixable, but delay makes correction more expensive.

Excluded Eligible Employees

If you discover someone should have been covered but was not, you must open a SEP IRA in their name and make a corrective contribution equal to the same percentage of compensation other employees received for each year they were excluded, plus an earnings adjustment for what the money would have earned had it been invested on time. You cannot reduce other employees’ contributions to offset the cost. Minor, isolated mistakes may qualify for self-correction; larger or recurring failures typically require a Voluntary Correction Program filing on Form 14568, which carries a fee based on the total IRA balances in the plan.¹⁴

Excess Contributions

If contributions went over the annual limit, the excess (adjusted for earnings) must be distributed from the employee’s SEP IRA and returned to the employer. The employer loses the deduction for the excess, but the employee does not owe tax on the returned amount. Alternatively, under the Voluntary Correction Program, the IRS may let the excess stay in the account if the employer pays a compliance fee of at least 10% of the excess. That fee does not apply if the excess is under $100.¹⁵ Catching the error early and documenting the correction is far better than having it surface during an audit.

1
Internal Revenue Service. Simplified Employee Pension Plan (SEP)
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Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)>
3
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
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Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
5
Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts
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Internal Revenue Service. Calculating Your Own Retirement Plan Contribution and Deduction
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Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
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Internal Revenue Service. Form 5305-SEP – Simplified Employee Pension Individual Retirement Accounts Contribution Agreement
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Internal Revenue Service. Maintaining Your Retirement Plan Records
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Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
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Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
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Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs)
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Internal Revenue Service. Rollover Chart
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Internal Revenue Service. SEP Plan Fix-It Guide – Eligible Employees Were Excluded From Participating
15
Internal Revenue Service. SEP Plan Fix-It Guide – Contributions to the SEP-IRA Exceeded the Maximum Legal Limits