A SEP IRA (Simplified Employee Pension) is a retirement account that an employer, including a self-employed person, funds for itself and its eligible workers. For 2026, contributions can reach the lesser of 25% of pay or $72,000 per person. The money grows tax-deferred, and the employer can deduct what it puts in. A SEP IRA is simple to run, but it has costs that are easy to miss.
You must cover eligible staff at the same percentage you give yourself. Sole proprietors can contribute less than a plain 25%. You also have until your tax filing deadline to act. This guide explains each rule and what it means for your planning.
Table of Contents
- How Much Can You Contribute in 2026?
- Why Self-Employed Owners Get About 20%, Not 25%
- Which Employees Must You Cover?
- How SEP Money Is Taxed
- Deadlines and Planning Steps
- Frequently Asked Questions
How Much Can You Contribute in 2026?
For 2026, each person's SEP contribution is capped at the lesser of 25% of pay or $72,000, up from $70,000 in 2025. KPMG's summary of IRS Notice 2025-67 reports the increase. The IRS also limits how much pay counts toward the 25% calculation. In 2026, only the first $360,000 of compensation counts, up from $350,000.
According to Schechter Benefits Law Group's review of the notice, highly paid owners hit the dollar cap before the percentage cap. Here is an example. An employee earning $100,000 can receive up to $25,000. An owner earning $360,000 would reach $90,000 at 25%, but the $72,000 cap applies first.
Why Self-Employed Owners Get About 20%, Not 25%
If you run a sole proprietorship, the 25% figure does not apply to your net business profit. First, you reduce your earnings by half of your self-employment tax. Then you reduce them again by the contribution itself. The result is an effective rate of about 20% of adjusted net profit for sole proprietors.
For example, a sole proprietor with $100,000 of profit after the self-employment tax deduction could contribute about $20,000, not $25,000. IRS Publication 560 includes the worksheet for the exact figure. Use it, or have your tax preparer run it, before you fund the account. If you contribute too much, you will need to correct it.
Which Employees Must You Cover?
A SEP must cover every employee who meets three tests. you cannot leave out anyone who qualifies. Only the employer contributes to a SEP. Employees cannot add their own salary deferrals.
The IRS SEP plan page says every eligible employee must get the same percentage of pay as the owner. That rule shapes the cost. If you give yourself 20%, each eligible employee also gets 20% of their pay. A solo owner or a business with few long-term staff pays little extra. A business with several eligible employees may find a SEP expensive.
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- Is at least 21 years old
- Worked for you in at least 3 of the last 5 years
- Earns at least $800 in 2026
How SEP Money Is Taxed
The employer deducts its SEP contributions. Employees pay no tax on pre-tax contributions until they withdraw the money. For the self-employed owner, this means the deduction lowers taxable income in the year of the contribution. Withdrawals follow traditional IRA rules. They are taxed as ordinary income.
If you take money out before age 59½, you usually owe a 10% penalty unless an exception applies. Since 2023, Section 601 of the SECURE 2.0 Act has allowed Roth SEP contributions. Kiplinger's 2026 SEP IRA guide explains that Roth contributions count as the employee's taxable income in the year they are made. A Roth SEP gives up the deduction now in exchange for a different tax treatment later. Not every provider offers a Roth SEP yet, so check with your provider before you plan around one.
Deadlines and Planning Steps
You can set up and fund a SEP for a tax year as late as your business's filing deadline, including extensions. So you can still make a 2026 contribution in 2027.
This lets you wait until your profit is known. If you file for an extension to gain time, fund the account before the extended deadline. A contribution made after that date cannot be counted for the prior tax year.
- Confirm your profit, or your employees' pay, for the year.
- List every worker who meets the age, service, and $800 tests.
- Choose a contribution percentage you can afford to give everyone.
- Run the Publication 560 worksheet if you are self-employed.
- Ask your provider whether it offers Roth SEP contributions, if you want them.
Frequently Asked Questions
Can employees add their own money to a SEP IRA?
No. Only the employer contributes to a SEP.
Does a SEP contribution for 2026 have to be made in 2026?
No. You can make it as late as your 2026 tax filing deadline, including extensions, which falls in 2027.
Is a Roth SEP contribution deductible?
No. Roth SEP contributions count as the employee's taxable income in the year they are made.
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