OpenYear

The SEP IRA, explained

A SEP IRA is the simplest retirement plan a business owner can have: almost no paperwork, contributions you can change or skip each year, and a deadline that runs past year-end. The trade-off is that at most incomes it lets you save less than a solo 401(k) — and employees have to get the same percentage you do.

By Robert O'Neill, founder of OpenYear · Checked against its sources September 21, 2026

How a SEP IRA works

SEP stands for simplified employee pension. The business contributes to a traditional IRA in each eligible person's name — including yours. Only the business contributes; there's no employee deferral. Contributions are deductible to the business and grow tax-deferred, and the account is an IRA like any other, held wherever you choose.

How much you can put in for 2026

  • Employees and S corporation owners: up to 25% of W-2 pay. For an S corporation owner that's salary only — distributions don't count.
  • Sole proprietors and partners: 20% of net earnings — profit less the deductible half of self-employment tax — because the contribution itself reduces the earnings it's figured on.
  • The ceiling: $72,000 per person, with pay counted up to $360,000. There's no catch-up for age.

Work out yours

Nothing you enter leaves this page.

    Employees get the same percentage

    A SEP must include every eligible employee: anyone 21 or older who has worked for you in at least three of the last five years and earned at least $800 from you in 2026. You can use looser rules, not stricter ones. Contributions follow a written formula that can't favor the highest paid — under the IRS's model SEP, every eligible employee gets the same percentage of pay as you. Putting 25% of pay in for yourself means 25% for them too.

    Setting one up

    • Sign a written agreement. Most owners use the IRS's model, Form 5305-SEP, or their brokerage's version. You keep it; you don't file it with the IRS.
    • Open a SEP IRA for yourself and each eligible employee, at any brokerage or bank that offers them.
    • Contribute by your return's due date, including extensions — so a SEP for 2026 can be opened and funded in 2027. That makes it the plan of choice when the year is already over.

    Contributions are optional: you can give less, or nothing, in a lean year. When you do contribute, it has to follow the formula for everyone.

    Roth SEP contributions

    Since 2023 the law allows SEP contributions to go into a Roth IRA. A Roth contribution isn't deductible — it's taxable to the person it's made for — but it comes out tax-free in retirement. Not every provider offers it yet.

    SEP IRA or solo 401(k)?

    With no employees, a solo 401(k) usually allows more at the same income, because it adds your own $24,500 deferral — and catch-up from age 50 — to the same business contribution. At $100,000 of sole-proprietor profit, a SEP takes about $18,600 and a solo 401(k) about $43,100. The SEP's advantages are simplicity, and the after-year-end deadline. Compare them for your income →

    When it doesn't fit

    • You have employees and can't afford to give them your percentage.
    • You want to save more than 20–25% of your earnings — a solo 401(k) or, near retirement, a cash balance plan.
    • You'll need the money before 59½ — withdrawals then generally carry a 10% additional tax.

    Compare all the plans. Whether a SEP fits your business, and how much to put in, is a question for your CPA or financial advisor.

    Sources

    General information, not advice for your situation. Whether a strategy fits depends on your facts — talk to your CPA or tax attorney about whether you qualify before you put it in place. Your accountant remains responsible for your return.

    Know where yours stands, all year.

    OpenYear reads your books, shows which strategies fit your business and why, and keeps the records each one needs — ready for your accountant. It's built for owner-operated S corporations.

    ApplyView the sample report