Who Can Contribute to a SEP IRA? Employer and Employee Rules

Only the employer contributes to a SEP IRA. Employees cannot add their own salary-deferral money to the account, and the business must include every worker who meets three federal tests: age 21, service in three of the last five years, and at least $800 in compensation for 2026. Self-employed people qualify by acting as both the employer and the employee.

The Employer Is the Only Contributor

This is the feature most people get wrong about SEP IRAs. Every dollar that lands in a participant’s account comes from the business. Employees cannot make elective deferrals or salary-reduction contributions, and catch-up contributions are not permitted either.¹

An employee who wants to save more on their own can still make regular traditional IRA contributions into the same SEP-IRA account, subject to the ordinary IRA annual limits, but only if the plan document allows non-SEP contributions.¹

What the employee gets in return is immediate ownership. Every employer contribution is 100% vested the moment it hits the account, with no waiting period and no vesting schedule. The employee also controls how the money is invested among the options the financial institution offers, and if they leave the company the next day the full balance goes with them.²

Any business can set up the plan. Sole proprietorships, partnerships, corporations, and nonprofits all qualify, with no minimum or maximum number of employees. A single freelancer and a company with hundreds of workers are on equal footing.³

The Three Employee Eligibility Requirements

If your business adopts a SEP, you must include every employee who meets all three of these conditions:

Has reached age 21.
Has worked for you in at least three of the last five years. Even a small amount of work in a given year counts as a full year of service.
Received at least $800 in compensation during the current year. That is the 2026 threshold, and it is adjusted annually for inflation.⁴

Compensation for this test means the taxable amounts on a W-2: wages, salaries, tips, bonuses, commissions, and vacation pay. It does not include severance pay, nontaxable fringe benefits, or workers’ compensation payments.⁵

These three requirements are the strictest an employer is allowed to impose. You can be more generous. You could open the plan after one year of service instead of three, or drop the minimum age to 18. What you cannot do is add hurdles the law does not permit, such as a minimum-hours requirement. The IRS is explicit that any work of any length in a year counts as service for that year.⁶

If an eligible employee refuses or fails to open an IRA, the employer is still on the hook. The business can open a SEP-IRA on the worker’s behalf and deposit the contribution there. Skipping that person because they didn’t cooperate would violate the plan’s uniform-percentage rule.¹

Employees the Plan May Exclude

Even when a worker clears all three tests, two categories can be left out:

Employees covered by a collective bargaining agreement, provided retirement benefits were a genuine subject of good-faith bargaining between the employer and the union.
Nonresident aliens who received no U.S.-source earned income from the employer.⁶

Leased workers are a trickier case. If someone works for your business through a staffing agency and meets the tax code’s definition of a leased employee, you generally must treat them as your own for SEP eligibility. An exception applies when the leasing company maintains its own qualifying retirement plan for that worker and leased employees make up less than 20% of your workforce.

Self-Employed Individuals and Freelancers

If you work for yourself as a sole proprietor, independent contractor, or freelancer, you play both roles. You are the employer setting up the plan and the employee receiving the contribution. No staff is required. The only prerequisite is net earnings from self-employment, because without earned income there is nothing to base a contribution on.

The math is not as simple as taking 25% of net profit. The SEP contribution itself is deductible, and you also deduct half of your self-employment tax, so the calculation is circular. The IRS handles this with a reduced contribution rate. At the maximum 25% plan rate, the effective figure works out to roughly 20% of net earnings after the self-employment tax deduction. Publication 560 provides rate tables and worksheets that walk through the calculation.⁷ The IRS also publishes an online walkthrough with a worked example.⁸

Even at the reduced effective rate, a SEP lets self-employed people save far more than the $7,000 annual cap on traditional and Roth IRA contributions. That gap is the reason the plan appeals to this group.

How Much the Employer Can Put In for 2026

For the 2026 tax year, the employer’s contribution to each participant’s SEP-IRA is capped at the lesser of:

Only the first $360,000 of any employee’s compensation can be counted in the calculation.⁴ Someone earning $500,000 has their contribution figured on $360,000 at most, which produces $72,000 at the full 25% rate.

The percentage has to be uniform across everyone eligible. If the owner gets a 15% contribution, every qualifying employee gets 15%. The employer can change the rate from year to year, or skip a year entirely, since the plan is discretionary. Whatever rate is chosen for a given year applies to everyone equally.¹⁰ On the business’s tax return, SEP contributions are deductible up to 25% of total compensation paid to all eligible employees during the year.¹

Deadline to Set Up and Fund the Plan

A SEP is unusual in that it can be established and funded retroactively. Both the plan setup and the contribution for a given tax year are due by the filing deadline of the employer’s income tax return, including extensions. For most calendar-year businesses that means April 15, or October 15 with an extension.¹

That timing is the SEP’s advantage over a 401(k), which must be in place by December 31 of the tax year itself. A business owner who has a strong year can wait until they file their return, see the final income figure, and then set up and fund the SEP for that year. Miss the deadline without filing an extension and the contribution cannot be deducted on that year’s return, though it may be deductible the following year.

What Happens If You Leave Out an Eligible Employee

Skipping someone who qualifies, whether by mistake or by misreading the rules, is a plan failure the IRS expects the employer to fix. The correction is to open a SEP-IRA for the excluded worker and deposit a make-up contribution equal to the same percentage every other participant received for each year the employee was left out, increased by the investment earnings the employee missed during the period of exclusion. Contributions already made to other employees’ accounts are not reduced; the fix only adds.⁶

The IRS also offers a formal cleanup route through the Employee Plans Compliance Resolution System. Insignificant operational failures can be handled under the Self-Correction Program without any filing. Larger problems can go through the Voluntary Correction Program, where the employer submits a correction proposal and pays a user fee in exchange for IRS approval.¹¹

1
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
2
Internal Revenue Service. Simplified Employee Pension Plan (SEP)
3
Internal Revenue Service. SEP Plan Fix-It Guide – SEP Plan Overview
4
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
5
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs – Section: Participation
6
Internal Revenue Service. SEP Plan Fix-It Guide – Eligible Employees Were Excluded From Participating
7
Internal Revenue Service. Publication 560 (2025), Retirement Plans for Small Business
8
Internal Revenue Service. Self-Employed Individuals: Calculating Your Own Retirement Plan Contribution and Deduction
9
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
10
Internal Revenue Service. SEP Plan Fix-It Guide – Contributions to Each Participant’s SEP-IRA Weren’t a Uniform Percentage of the Participant’s Compensation
11
Internal Revenue Service. Rev. Proc. 2021-30