SEP IRA Rules and Contribution Limits for 2026: The Complete Guide

I set up and review SEP IRAs for clients every year, from consultants with a side business to owners with a handful of employees. The plan is genuinely simple. The rules around it are not quite as simple, and most of the expensive mistakes I see come from three places: calculating the self-employed contribution wrong, forgetting that employees must get the same percentage, and not realizing a SEP balance can wreck a backdoor Roth. This guide walks through all of it with 2026 numbers.

What is a SEP IRA?

A SEP IRA is a traditional IRA that receives employer contributions under a written SEP arrangement. “SEP” stands for Simplified Employee Pension, and the word “simplified” is earned:

• There is no annual Form 5500 filing for a SEP.
• You decide each year whether to contribute and how much (within the limits). You can skip a year entirely.
• The money goes into an IRA in each participant’s own name, at a brokerage or bank you choose.
• Contributions are 100% vested (owned by the employee) the moment they go in.

The key thing to understand: all SEP money is employer money. There are no employee salary deferrals like a 401(k) has. (A few older plans called SARSEPs allow deferrals, but no new SARSEPs have been allowed since 1997.) If you are self-employed, you wear both hats. Your business is the employer, and you are the employee.

Contributions are deductible to the business, grow tax-deferred, and are taxed as ordinary income when withdrawn, just like a traditional IRA. The usual IRA rules apply on the way out: a 10% additional tax on most withdrawals before age 59½, and required minimum distributions starting at age 73.

Who can open a SEP IRA?

Any employer can establish a SEP, including:

• Sole proprietors and single-member LLCs, including freelancers, consultants, and gig workers.
• People with side income. If you have a W-2 job with a 401(k) and also earn self-employment income on the side, you can usually open a SEP for the side business. Your 401(k) deferrals at an unrelated employer do not reduce your SEP limit, because the limits apply per employer.
• Partnerships and multi-member LLCs.
• S corporations and C corporations, of any size, though SEPs work best for businesses with few or no employees (more on why below).

There is no income limit for participating, and no age limit for contributing. You can keep making SEP contributions after age 73 as long as you have earned income, even while you take required distributions from the same account.

SEP IRA contribution limits for 2026

The IRS released the 2026 figures in Notice 2025-67. Here is everything that matters for a SEP:

A few points worth spelling out.

The 25% applies to W-2 pay. If you are an employee of the business (including an S corporation owner on payroll), your contribution can be up to 25% of your W-2 wages, up to $72,000. A $100,000 salary supports a $25,000 SEP contribution.

The compensation cap rarely binds by itself. 25% of $360,000 is $90,000, which is above the $72,000 cap. So for most people the $72,000 dollar limit is the ceiling you hit first. The $360,000 cap matters for the same-percentage rule with employees, because pay above $360,000 is ignored when figuring everyone’s percentage.

There is no catch-up in a SEP. A 401(k) lets people 50 and older add $8,000 more in 2026 ($11,250 for ages 60 to 63). A SEP has nothing like that. This is one of the main reasons a Solo 401(k) often beats a SEP for older owners.

Your own IRA is separate. SEP contributions do not use up your $7,500 IRA limit. You can contribute to a SEP and a Roth IRA in the same year, subject to the normal Roth income limits. One catch: being covered by a SEP makes you an “active participant” in a retirement plan, which can limit or eliminate the deduction for a separate traditional IRA contribution if your income is above the 2026 phase-out ranges ($81,000 to $91,000 single, $129,000 to $149,000 married filing jointly).

How to calculate a self-employed SEP contribution (with a worked example)

This is where most people get it wrong. If you are a sole proprietor or partner, you do not get 25% of your Schedule C profit. You get 25% of your profit after subtracting the SEP contribution itself, and after subtracting half of your self-employment tax. The math works out to an effective rate of 20%.

Why 20%? The IRS defines your compensation as net earnings minus your own contribution. If your contribution is C and your earnings before the contribution are E, the rule is C = 25% × (E - C). Solve it and C = E × 0.25 ÷ 1.25, which is 20% of E. The IRS publishes this as the “reduced rate” in the Rate Table in Publication 560.

The four steps

1. Start with your net profit from Schedule C (or your partnership self-employment income).
2. Figure your self-employment tax, then take half of it. That half is a deduction.
3. Subtract half the self-employment tax from net profit.
4. Multiply by 20%. Cap the result at $72,000.

Worked example: a consultant with $150,000 of profit in 2026

Maria is a self-employed marketing consultant with no employees. Her 2026 Schedule C shows $150,000 of net profit.

Step 1: net profit. $150,000.

Step 2: self-employment tax. Self-employment tax is figured on 92.35% of net profit: $150,000 × 92.35% = $138,525. That is under the 2026 Social Security wage base of $184,500, so the full 15.3% applies:

• Social Security (12.4%): $17,177
• Medicare (2.9%): $4,017
• Total self-employment tax: $21,194
• Half of it: $10,597

Step 3: subtract. $150,000 - $10,597 = $139,403.

Step 4: multiply by 20%. $139,403 × 20% = $27,880.

So Maria can contribute about $27,880 to her SEP IRA for 2026, not the $37,500 she would get from a quick “25% of $150,000.” If she put in $37,500, roughly $9,600 would be an excess contribution, which is not deductible and can trigger excise taxes until it is corrected.

If Maria is in the 24% federal bracket, the $27,880 deduction could save about $6,700 of federal income tax this year; state treatment can differ, so ask your CPA. Note the SEP deduction does not reduce self-employment tax. It lowers income tax only.

How much profit does it take to reach $72,000?

Working the same formula backward, a sole proprietor with no employees needs roughly $376,500 of net profit in 2026 to reach the full $72,000. Above that, the dollar cap holds you at $72,000.

S corporation owners: only salary counts

If your business is an S corporation, your SEP contribution is based on the W-2 salary the company pays you, not on the distributions. An owner paying themselves $80,000 of salary and taking $120,000 in distributions can contribute 25% of $80,000, or $20,000. This is one of the real tradeoffs in setting a reasonable S corp salary: a lower salary saves payroll tax but shrinks the retirement contribution.

Employee eligibility and the same-percentage rule

If you have no employees, skip ahead. If you do, this is the section that decides whether a SEP makes sense.

Who must be covered

You must make a contribution for every employee who meets all three of these tests in 2026:

• Is at least age 21,
• Has worked for you in at least 3 of the last 5 years (any amount of work in a year counts as a year), and
• Earned at least $800 from you in 2026.

You can write looser rules (for example, cover everyone immediately), but not stricter ones. You may exclude union employees whose retirement benefits were bargained for, and nonresident aliens with no U.S. income. Part-time employees are not automatically excluded. Someone who works a few weeks each summer can qualify under the 3-of-5 rule.

The same-percentage rule

Under the standard IRS form and most prototype SEPs, every eligible employee gets the same percentage of pay that you give yourself. Here is the part that surprises owners: the comparison is made at the 25% plan rate, not your 20% effective rate.

Example. Maria (from above) hires an assistant, Jordan, who earns $60,000 and becomes eligible. If Maria contributes her full $27,880, that is a 25% plan rate on her compensation. Jordan must also get 25% of pay: $15,000. That is $15,000 of real cost for every $27,880 Maria puts away for herself.

You can choose a lower percentage in any year (say 10% for everyone) or skip the contribution entirely, but whatever you choose applies to everyone eligible. You cannot give yourself 25% and employees 3%.

This is why SEPs fit solo owners and owner-plus-spouse businesses so well, and why they get expensive fast once you have eligible staff. With employees, a 401(k) with profit sharing (where employees fund much of their own benefit through deferrals) or a design that tilts contributions toward older owners, like a new comparability profit sharing plan, is often more efficient.

SEP IRA deadlines for 2026

A SEP has one of the most forgiving calendars of any retirement plan. Both setting up the plan and making the contribution can happen after the year ends.

Two practical notes:

• The extension has to be real. You only get the later date if you actually file the extension on time. Filing an extension for the return does not extend the time to pay tax you owe.
• Late-year planning works. A client who finds out in March 2027 that 2026 was a great year can open a SEP in March and still deduct a 2026 contribution. That flexibility is the SEP’s biggest practical advantage.

When you make a contribution between January 1 and the deadline, tell the custodian which year it is for. The IRA custodian reports the deposit on Form 5498, and a mislabeled year is a common cleanup project.

How to open a SEP IRA

1. Adopt a written plan. Most people use IRS Form 5305-SEP, a one-page model agreement. You fill it in, sign it, and keep it in your records. It is not filed with the IRS. Many brokerages also offer their own IRS-approved prototype SEP document.
2. Give a copy to eligible employees, along with the required disclosure information.
3. Open a SEP IRA account for yourself and for each eligible employee at a brokerage, bank, or other IRA custodian.
4. Make contributions by the deadline, and keep a record of how you calculated them.

You cannot use Form 5305-SEP if any of these apply: you maintain another qualified retirement plan (other than another SEP), you have eligible employees for whom SEP IRAs have not been opened, you use leased employees, or you are part of a controlled group where not all eligible employees would participate. In those cases you need a prototype or individually designed SEP, and it is worth having your CPA or a plan professional look at the setup.

Roth SEP IRA under SECURE 2.0

Since 2023, the SECURE 2.0 Act (Section 601) has allowed SEP contributions to go into a Roth IRA if the employee elects it. IRS Notice 2024-2 filled in the rules:

• It is optional for the employer to offer the Roth choice. Many custodians still do not support Roth SEP contributions, so check before you count on it.
• The employee has to elect Roth in advance. The employer cannot default someone into Roth.
• The contribution is taxable income to the employee for the year it is deposited. It is reported on Form 1099-R as if it went into a traditional SEP IRA and was immediately converted.
• It still counts toward the same limit (25% / 20% / $72,000).

For a self-employed person, a Roth SEP contribution means giving up this year’s deduction in exchange for tax-free growth and tax-free qualified withdrawals later. Whether that trade makes sense depends on your bracket today versus what you expect in retirement. It is the same question as a Roth conversion, and our Roth conversion calculator is a reasonable way to think it through.

One timing detail to raise with your CPA: because Roth SEP money is taxed in the year deposited, a contribution “for 2026” deposited in March 2027 may be income on your 2027 return, not 2026.

The SEP IRA and the backdoor Roth: the pro-rata trap

This is the mistake I see most often among high earners.

A backdoor Roth means making a nondeductible traditional IRA contribution and converting it to a Roth. It only works cleanly if you have no other pre-tax IRA money. When you convert, the IRS looks at all your traditional, SEP and SIMPLE IRA balances as of December 31 of the year of the conversion and treats the conversion as a proportional mix of pre-tax and after-tax dollars. That is the pro-rata rule, and your SEP IRA is included in it.

Example. You have $142,500 in a SEP IRA and make a $7,500 nondeductible IRA contribution, then convert $7,500. Your total IRA balance is $150,000, of which only $7,500 (5%) is after-tax. So 95% of the conversion, $7,125, is taxable. The “backdoor” mostly failed.

The common fixes are rolling the SEP balance into a 401(k) that accepts roll-ins (a Solo 401(k) can do this) or skipping the backdoor. I go deeper on this in the pro-rata rule that ruins a backdoor Roth for owners, and you can run your own numbers with the backdoor Roth pro-rata calculator.

SEP IRA pros and cons

Pros

• Very simple to set up and run, with no annual Form 5500 filing and low or no cost at most brokerages.
• Flexible: contribute any amount up to the limit, or nothing, each year.
• Can be opened and funded after the year ends, up to the extended filing deadline.
• High ceiling: up to $72,000 per person in 2026.
• Works alongside a 401(k) from an unrelated employer for people with side income.
• Roth option now available (where the custodian supports it).

Cons

• No employee deferrals and no catch-up contributions, so at modest incomes a Solo 401(k) shelters much more.
• The same-percentage rule makes it expensive once you have eligible employees.
• Employees are 100% vested immediately, including people who leave after a year.
• A SEP balance counts in the pro-rata rule and can spoil a backdoor Roth.
• No loans (a 401(k) can allow them).

When a Solo 401(k) or another plan beats a SEP

For a self-employed person with no employees other than a spouse, the main rival is the Solo 401(k). The employer side is the same 20% calculation as a SEP. On top of it, you can make an employee deferral of up to $24,500 in 2026, plus an $8,000 catch-up at 50 or older ($11,250 at ages 60 to 63).

Here is Maria’s $150,000 year side by side:

At this income, the Solo 401(k) more than doubles what Maria can shelter. The gap narrows at higher incomes. Once net profit reaches roughly $376,500, both plans hit the $72,000 cap, and only the 401(k) catch-up keeps the Solo 401(k) ahead for owners 50 and older.

Here is how I usually think about the choice:

For the full breakdown, including income-by-income charts, see SEP IRA vs Solo 401(k): which shelters more for one owner. If you have employees, our retirement plan services cover 401(k), profit sharing and cash balance designs.

Did the One Big Beautiful Bill Act change the SEP? Not directly. The SEP limits for 2026 come from the normal inflation adjustments, and the structure of the plan is the same as before.

How Modern Wealth can help

Choosing a plan is really a question about your income pattern, your employees, your Roth plans and your retirement timeline, not just this year’s deduction. As a fee-only fiduciary, I help clients compare a SEP against the alternatives with their actual numbers, coordinate the setup and contribution with their CPA, and fit the plan into a broader retirement plan. If that would be useful, I’m happy to talk it through.

Frequently asked questions

How much can I contribute to a SEP IRA in 2026?

Up to 25% of W-2 compensation, or about 20% of net self-employment earnings after the half-of-self-employment-tax deduction, with a maximum of $72,000. Only the first $360,000 of compensation counts. A self-employed person with $150,000 of net profit can contribute about $27,880.

Can I contribute to a SEP IRA and a Roth IRA in the same year?

Yes. SEP contributions do not reduce your separate $7,500 IRA limit ($8,600 at age 50 or older) for 2026. Your Roth IRA contribution is still subject to the normal income limits. If you plan to use the backdoor Roth instead, remember your SEP balance counts in the pro-rata calculation.

Can I have a SEP IRA if I have a 401(k) at work?

Usually yes, if you have separate self-employment income. The SEP is tied to your side business, and its limit is figured on that business’s earnings. Your 401(k) deferrals at an unrelated employer do not reduce it. If both are with the same business or a related one, the rules are different and your CPA should look at it.

What is the deadline for SEP IRA contributions?

Your business’s tax filing deadline for the year, including extensions. For a sole proprietor’s 2026 contribution, that is April 15, 2027, or October 15, 2027 if you file an extension. You can even open the SEP up to that same date.

Do I have to contribute to my SEP IRA every year?

No. You can contribute any percentage up to the limit, or nothing, each year. If you contribute for yourself, you must contribute the same percentage of pay for every eligible employee.

What is the downside of a SEP IRA?

The main drawbacks are no employee deferrals and no catch-up contributions (so a Solo 401(k) often allows more at moderate incomes), the cost of covering employees at the same percentage you give yourself, and the way a SEP balance interferes with backdoor Roth conversions.

Is a SEP IRA better than a traditional IRA?

They do different jobs. A traditional IRA is limited to $7,500 in 2026 ($8,600 at 50 or older) for anyone with earned income. A SEP is an employer plan with a limit up to $72,000 but requires business income. Many self-employed people use both: a SEP for the large contribution and a Roth or traditional IRA on top.

This article is for general education and is not tax, legal or investment advice for your situation. Talk with your tax and legal advisors before acting.

Sources

• IRS Notice 2025-67, 2026 cost-of-living adjustments for retirement plan limits ($72,000 section 415(c) limit; $360,000 compensation limit; $800 SEP compensation threshold): https://www.irs.gov/pub/irs-drop/n-25-67.pdf
• IRS news release, 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500 (catch-ups, IRA deduction phase-outs): https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
• IRS Publication 560, Retirement Plans for Small Business (SEP rules, Form 5305-SEP restrictions, deadlines, self-employed rate table): https://www.irs.gov/publications/p560
• IRS, Retirement Plans FAQs regarding SEPs: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
• IRS Form 5305-SEP: https://www.irs.gov/forms-pubs/about-form-5305-sep
• IRS Notice 2024-2, Section K (Roth SEP and SIMPLE IRA contributions under SECURE 2.0 Section 601): https://www.irs.gov/pub/irs-drop/n-24-02.pdf
• Social Security Administration, Contribution and Benefit Base ($184,500 for 2026): https://www.ssa.gov/oact/cola/cbb.html
• IRS Publication 590-B, Distributions from Individual Retirement Arrangements (pro-rata rule, Form 8606 aggregation): https://www.irs.gov/publications/p590b

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