A SEP IRA and a SIMPLE IRA are both small-business retirement plans that run through individual retirement accounts and skip the annual IRS filings that make 401(k) plans expensive to maintain, but they answer different questions. A SEP is funded entirely by the employer, allows contributions of up to $72,000 per employee in 2026, and can be established as late as the tax filing deadline. A SIMPLE lets employees defer up to $17,000 of their own pay in 2026 and requires the employer to match or make a flat contribution every year without exception. The choice between a SEP IRA and a SIMPLE IRA usually comes down to who you want funding the account, how predictable your income is, and how many people you employ.
Who Puts the Money In
This is the split that drives everything else. A SEP IRA is employer-funded only. Employees cannot contribute their own money. The employer decides each year how much to put in, and that amount can change from year to year or drop to zero when cash is tight.
A SIMPLE IRA works the opposite way. Employees choose how much of their paycheck to redirect into the account, and the employer is required to add either a matching contribution or a flat nonelective contribution every year. There is no skipping a year.
SEPs favor businesses with volatile income and owners who want to shovel large amounts into their own retirement in profitable years. SIMPLEs favor businesses that want employees actively saving from their paychecks, with the employer match acting as the incentive. A business can maintain only one of these plans at a time.
Which Businesses Qualify
Any business of any size can set up a SEP IRA. Sole proprietors, partnerships, S-corps, C-corps, and tax-exempt organizations all qualify, and there is no headcount cap. The main restriction is that the employer cannot also maintain a separate qualified retirement plan covering the same employees during the same period, with limited exceptions for union employees under collective bargaining agreements.
SIMPLE IRAs are tighter. The employer must have had no more than 100 employees who earned at least $5,000 in compensation during the preceding calendar year.1Office of the Law Revision Counsel. 26 USC 408 – Individual Retirement Accounts The business also cannot run another employer-sponsored retirement plan alongside it. If the company outgrows the 100-employee threshold, it gets a two-year grace period before it has to move to a different plan type.
Which Employees You Must Cover
SEP eligibility rules require the employer to include any employee who is at least 21, has worked for the business in at least three of the last five years, and earned at least $800 in compensation for the current year.2Internal Revenue Service. Retirement Plans FAQs Regarding SEPs The employer can set less restrictive thresholds, like one year of service instead of three, but cannot make the rules tighter than the statutory defaults.
SIMPLE IRAs must be offered to every employee who earned at least $5,000 in compensation during any two preceding calendar years and is reasonably expected to earn at least $5,000 in the current year. Again, the employer can loosen these requirements but cannot add conditions beyond them. Self-employed individuals who meet the compensation threshold count as participants in their own plan.
Excluding an eligible employee is one of the fastest ways to jeopardize the plan’s tax-advantaged status. The IRS treats it as a qualification failure, and the fix typically means making corrective contributions to the excluded employee’s account, sometimes with lost earnings added on top.3Internal Revenue Service. 401(k) Plan Fix-It Guide – Eligible Employees Werent Given the Opportunity to Make an Elective Deferral Election
2026 Contribution Limits Side by Side
SEP IRA
In 2026, the maximum SEP contribution per employee is the lesser of 25% of compensation or $72,000.4Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs) There are no employee deferrals and no catch-up contributions. Contributions are discretionary, but whatever percentage the employer chooses has to apply equally to every eligible employee. You cannot contribute 25% for the owner and 10% for the staff.
Contributing more than the allowable amount triggers a 10% excise tax on the nondeductible portion of the excess.5Office of the Law Revision Counsel. 26 USC 4972 – Tax on Nondeductible Contributions to Qualified Employer Plans
SIMPLE IRA
Employees can defer up to $17,000 in 2026.6Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits Participants aged 50 and older can add a $4,000 catch-up, bringing them to $21,000. A separate SECURE 2.0 catch-up applies to participants aged 60 through 63: $5,250 in 2026, replacing the standard $4,000 for those ages.7Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 A 62-year-old could defer up to $22,250. At 64, the catch-up drops back to $4,000.
Businesses with 25 or fewer employees can use a higher deferral tier: $18,100 in 2026, with a $3,850 catch-up for those aged 50 and older.7Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
On the employer side, one of two contributions is mandatory each year:
- Matching contribution: dollar-for-dollar match of what the employee defers, up to 3% of compensation. An employee earning $80,000 who defers $2,400 gets a $2,400 match. An employee who defers nothing gets nothing.
- Nonelective contribution: a flat 2% of compensation for every eligible employee, whether they defer anything or not.
The employer picks one option each year and can switch between them, though the matching option can be reduced to as low as 1% in no more than two out of any five years.8Internal Revenue Service. SIMPLE IRA Plan The 2% nonelective contribution is calculated only on compensation up to the annual limit ($345,000 in 2024, adjusted each year for inflation).
The Self-Employed Calculation Trap
Sole proprietors and single-member LLC owners run into a wrinkle. You cannot simply multiply your Schedule C profit by 25% and call it your SEP contribution. The IRS requires you to reduce your net self-employment income by the deductible portion of your self-employment tax first, and because the contribution itself reduces the compensation base it’s calculated on, the math becomes circular.9Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
A 25% plan contribution rate translates to roughly 20% of your net self-employment earnings after the adjustment. On $200,000 of Schedule C net profit, the maximum SEP contribution comes out closer to $37,000 than to $50,000. The rate table and worksheet in IRS Publication 560 walks through the math, and most tax software handles it automatically. For a self-employed SIMPLE participant, salary reduction contributions must be deposited within 30 days after the end of the tax year.10Internal Revenue Service. SIMPLE IRA Tips for the Sole Proprietor
Setup Deadlines and the Forms You Need
The setup timing is where these plans diverge most sharply.
A SEP IRA can be established as late as the due date of the employer’s tax return, including extensions.2Internal Revenue Service. Retirement Plans FAQs Regarding SEPs A sole proprietor on extension has until October 15 to set up and fund a SEP for the prior tax year. It is one of very few retirement plans you can create retroactively.
A SIMPLE IRA offers no such flexibility. A new plan must be established no later than October 1 of the year it takes effect. Employers that come into existence after October 1 can set one up as soon as administratively feasible. If the plan already existed in a prior year, the only permissible effective date for the following year is January 1.8Internal Revenue Service. SIMPLE IRA Plan
Employers adopt a SEP by completing Form 5305-SEP, which serves as the written plan agreement and stays in the employer’s records rather than being filed with the IRS.11Internal Revenue Service. SEP Plan Fix-It Guide – SEP Plan Overview SIMPLE IRAs use one of two forms depending on how accounts are held:
- Form 5304-SIMPLE when employees choose their own financial institution.
- Form 5305-SIMPLE when the employer designates a single financial institution for all accounts.
Both SIMPLE forms serve as the plan document and stay with the employer.12Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – SIMPLE IRA Plan Overview To complete either form you need the business’s legal name, EIN, effective date, and the custodian’s account information.
Ongoing Notices and Deposit Timing
SEP IRAs require the employer to give each eligible employee a copy of Form 5305-SEP and its instructions. The plan is not considered adopted until that distribution happens.11Internal Revenue Service. SEP Plan Fix-It Guide – SEP Plan Overview Beyond that, ongoing notice duties are light because employees do not make elections.
SIMPLE IRAs are more demanding. Before November 2 each year, the employer must notify all eligible employees of their right to make or change salary deferral elections, which type of employer contribution the business will make for the upcoming year, and a summary description of the plan.13Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide – Annual SIMPLE IRA Plan Notification Requirements Werent Followed November 2 starts the 60-day election period that runs through December 31.14U.S. Department of Labor. SIMPLE IRA Plans for Small Businesses Missing or late notices are a common compliance failure and often need to be fixed through the IRS voluntary correction programs.
On the deposit side, SIMPLE employee deferrals must reach the account as soon as they can reasonably be separated from general business assets, and in any event no later than 30 days after the end of the month in which the employee would otherwise have received the money.10Internal Revenue Service. SIMPLE IRA Tips for the Sole Proprietor The Department of Labor applies a tighter safe harbor for plans with fewer than 100 participants: 7 business days from the date the amounts would have been paid. Late deposits are a fiduciary violation. The employer may owe excise taxes and must pay any investment earnings the employee lost while the money sat in the business account. SEP timing is simpler because only the employer contributes: contributions are generally deductible for the tax year if deposited by the tax filing deadline, including extensions.
Early Withdrawals and Rollovers
Both plans follow the same basic early withdrawal rule as traditional IRAs. Distributions taken before age 59½ are taxed as ordinary income and hit with a 10% additional tax, subject to the standard exceptions for disability, certain medical expenses, and first-time home purchases up to $10,000.15Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
SIMPLE IRAs add an extra penalty that catches people off guard. During the first two years of participation, measured from the date the first contribution hits your account, early withdrawals that do not qualify for an exception carry a 25% additional tax instead of the usual 10%.15Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions The same 25% penalty applies if you roll the funds into a non-SIMPLE IRA during that window, because the IRS treats the transfer as a taxable distribution.16Internal Revenue Service. SIMPLE IRA Withdrawal and Transfer Rules
After the two-year window passes, SIMPLE funds can be rolled into a traditional IRA, a 401(k), or another eligible plan without penalty. SEP funds face no such waiting period and can be rolled over at any time, subject to the normal early-withdrawal rules if you take the money as cash rather than moving it directly.
Both plans are subject to required minimum distributions. Under SECURE 2.0, participants born between 1951 and 1959 must begin taking distributions in the year they turn 73. Those born in 1960 or later start in the year they turn 75.
When to Move Up to a 401(k)
Businesses that outgrow a SIMPLE sometimes want to switch to a 401(k) for the higher contribution limits and design flexibility. Historically, that meant terminating the SIMPLE at year-end and starting the 401(k) the following January. SECURE 2.0 allows employers to replace a SIMPLE IRA with a safe harbor 401(k) mid-year, provided the replacement plan meets safe harbor requirements, meaning the employer commits to a matching or nonelective formula that automatically passes nondiscrimination testing.
Running two plan types within a single calendar year is administratively messy, so most employers making the switch benefit from professional guidance to keep contributions, notices, and rollovers clean.