SIMPLE IRA vs SEP IRA
Both are cheap, low-paperwork retirement plans for small businesses. The difference that decides it: with a SEP, your employees get the same percentage of pay you give yourself. With a SIMPLE IRA, they mostly fund their own accounts, and the business adds 2–3%. Here's how to tell which fits.
Side by side
| SEP IRA | SIMPLE IRA | |
|---|---|---|
| Who puts money in | The business only | Employees defer from pay; the business adds a match or a fixed contribution |
| 2026 limits | 25% of pay (20% of net earnings if self-employed), up to $72,000 | $17,000 deferral, plus $4,000 catch-up at 50 ($5,250 at 60–63), plus the business's 2–3% |
| What employees get | The same percentage of pay as the owner | A 3% match on what they defer, or 2% of pay whether they defer or not |
| Who can offer it | Any business | 100 or fewer employees, and no other plan |
| Employees who must be included | 21+, worked 3 of the last 5 years, paid $800 in 2026 | Paid $5,000 in any 2 prior years and expected to this year |
| Can the business skip a year? | Yes | No — the match or 2% is required each year |
| Deadline to set up | Your tax return's due date, with extensions | October 1, to cover that year |
| Early withdrawals | 10% additional tax before 59½ | 25% in the first two years, then 10% |
Which one fits
- No employees: neither — a solo 401(k)usually allows more than both. If you want the simplest thing, a SEP.
- A few employees, and you want to save a lot yourself: a SIMPLE IRA often wins. You can defer$17,000 plus catch-up, and the employees cost the business 2–3% of their pay. Under a SEP, saving 20% for yourself means about 25% of their pay too.
- A lean or uncertain year: a SEP, because contributions are optional — and it can be set up after the year ends.
- High income, few or no staff: a SEP can reach $72,000; a SIMPLE tops out much lower.
SIMPLE IRA rules worth knowing
- It has to be your only plan. You can't pair a SIMPLE IRA with a 401(k) or SEP for the same year.
- The match can be lowered to as little as 1% of pay, in no more than two of any five years, with notice to employees.
- Set it up by October 1 to cover that year — a new business formed later in the year can start as soon as it's practical.
- Some small employers get a higher limit — $18,100 instead of $17,000 — under a 2022 law; ask your plan provider whether yours does.
- The first two years are different: withdrawals then carry a 25% additional tax, not 10%.
If you own an S corporation
Both plans are figured on your W-2 salary, not on the company's profit. Your SIMPLE deferral comes out of your pay; the business's 3% match or SEP contribution is based on the salary too.
Compare all the plans, or read the SEP IRA guide. Which plan fits your business is a question for your CPA or financial advisor.
Sources
- IRS Publication 560 — SIMPLE IRA and SEP rules: who can offer them, eligibility, contributions, deadlines
- IRS, SIMPLE IRA plan FAQs — the 25% additional tax in the first two years
- IRC §408(p) — the SIMPLE match, and lowering it
- IRS Notice 2025-67 — the 2026 limits
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.