The 2026 SEP-IRA limit is $72,000 — a fully tax-deductible retirement account for freelancers and small business owners with a flexible contribution deadline that runs to October.
A SEP-IRA (Simplified Employee Pension) lets self-employed workers and small business owners contribute up to $72,000 for 2026 — fully tax-deductible, tax-deferred growth, traditional (pre-tax) only. For self-employed filers, the effective contribution rate is roughly 18.6% of net Schedule C profit due to the circular SE tax calculation. Contributions are due by the employer tax-return deadline, including October extensions.
A SEP-IRA (Simplified Employee Pension Individual Retirement Arrangement) is a retirement savings plan the IRS designed for self-employed workers and small business owners. Any business of any size can establish a SEP plan — sole proprietors, partnerships, S-corporations, and C-corporations all qualify.
Unlike a 401(k), where both the employer and employee can make contributions, SEP-IRA contributions come entirely from the employer. For a freelancer or sole proprietor, that means you fund the account in your employer capacity. There are no employee salary deferrals, no matching requirements, and no annual compliance testing — the administrative simplicity is the plan's defining feature.
Any self-employed worker with net earnings from self-employment can establish a SEP plan. To receive contributions, a participant must meet all three of these IRS eligibility criteria:
For a sole proprietor or single-member LLC, you are simultaneously the employer and the employee. If you have W-2 employees who meet these criteria, you must contribute the same percentage for each of them as you contribute for yourself — that employer-coverage obligation is the primary tradeoff of a SEP versus a Solo 401(k).
The 2026 SEP-IRA contribution limit is $72,000, or up to 25% of an eligible employee's compensation, whichever is less. The compensation ceiling is $360,000 for 2026. A W-2 employee earning $288,000 or more hits the $72,000 cap exactly at 25%.
For reference: the 2025 limit was $70,000. The $2,000 increase reflects IRS inflation adjustments announced each fall in the applicable Revenue Procedure.
Here is where SEP math diverges from the W-2 world. For employees, "25% of compensation" is a direct multiplication. For self-employed workers, "compensation" means net self-employment earnings — net Schedule C profit minus the deduction for one-half of self-employment (SE) tax, and minus the SEP contribution itself. That circularity requires a special calculation.
IRS Publication 560 contains a worksheet that resolves the circular dependency step by step. The practical result: the effective SEP contribution rate for self-employed workers is approximately 18.587% of net Schedule C profit — not 25%, because the net earnings base shrinks after accounting for the SE tax and contribution deductions.
Simplified example: Net Schedule C profit: $180,000 Deduct half of SE tax (~$12,716): adjusted base ~$167,284 Maximum SEP contribution at effective rate: ~$31,119
Most major tax software platforms automate this calculation from your Schedule C figures. The IRS Publication 560 worksheet is the authoritative source — verify against it before filing.
Contributions are fully deductible above the line. Every dollar contributed reduces your adjusted gross income before any itemization decision. For a sole proprietor in the 22% federal bracket, a $25,000 SEP contribution saves roughly $5,500 in federal income tax, plus applicable state income tax. This deduction stacks with other above-the-line deductions, including the self-employment tax deduction and self-employed health insurance premiums.
Investment growth is tax-deferred. Dividends, interest, and capital gains inside the SEP-IRA compound without annual taxation. You pay ordinary income tax only on withdrawals in retirement.
No Roth option — traditional only. SEP-IRAs are pre-tax structures. Contributions reduce current-year income; withdrawals are taxed as ordinary income. High earners who want Roth-style tax-free growth alongside a SEP can use the backdoor Roth IRA strategy.
Required Minimum Distributions begin at age 73. Under the SECURE 2.0 Act, SEP-IRA holders must begin distributions at age 73 (increasing to 75 in 2033). Missing an RMD triggers a 25% excise tax on the undistributed amount, reduced to 10% if corrected within the two-year correction window.
SEP-IRA contributions can be made up to the employer's tax-return deadline, including extensions. For most sole proprietors and single-member LLC owners:
This deadline flexibility is a meaningful planning advantage. Unlike 401(k) salary deferrals — which must come from paychecks throughout the year — a SEP contribution can be calculated and deposited after year-end once final net income is known. You can even establish a brand-new SEP plan retroactively by the extended deadline: a freelancer who earned strong income in 2025 can open and fund a 2025 SEP-IRA as late as October 2026 on extension.
Setting up a SEP plan requires three steps:
1. Adopt a written plan. Complete IRS Form 5305-SEP — a model plan agreement — or use a prototype document from your chosen financial institution. You do not file Form 5305-SEP with the IRS; you retain it in your records as documentation that the plan was formally adopted. 2. Open IRA accounts. A SEP-IRA is an IRA held at any custodian that offers traditional IRAs — a brokerage, bank, or credit union. Each eligible participant (including you) needs a separate individual IRA account in their own name. 3. Fund by the deadline. Transfer the calculated contribution to each participant's account before the employer's return deadline, with or without extension.
There are no annual reporting requirements for most SEP plans with fewer than 100 participants — no Form 5500 at any asset level. This absence of mandatory filings is the plan's signature administrative advantage over a Solo 401(k), which requires Form 5500-EZ once plan assets exceed $250,000.
Both plans target self-employed taxpayers, but they differ structurally at lower income levels.
At lower net income (roughly under $130,000–$150,000), a Solo 401(k) typically allows a larger total contribution. It combines an employee salary deferral (up to $23,500 for 2026, plus $7,500 catch-up if you are 50 or older) with an employer profit-sharing contribution of up to 25% of compensation. That salary-deferral component gives the Solo 401(k) a headstart at lower incomes. Above $150,000 in net self-employment income, the two plans converge near the $72,000 ceiling.
The SEP wins on administrative simplicity: no Form 5500-EZ at any asset level, no elective deferral deadlines tied to paychecks, and no age-based catch-up tracking. Critically, a Solo 401(k) is available only to businesses with no non-spouse W-2 employees. If you hire workers who meet SEP eligibility criteria, a Solo 401(k) closes off — a SEP plan (or SIMPLE IRA) remains available.
For more on how pre-tax versus Roth retirement structures compare at the investor level, see the Roth 401(k) vs. Traditional 401(k) guide.
The SEP contribution fits into a broader self-employment tax-minimization stack. The self-employment tax deduction feeds directly into the SEP calculation — deducting half of SE tax is a required first step before applying the effective 18.587% rate. If you fund a health savings account, the HSA deduction for self-employed workers is a separate above-the-line reduction that stacks with the SEP deduction in high-income years.
Together, these deductions can meaningfully reduce both federal income tax and adjusted gross income — which matters for income-sensitive thresholds like the Roth IRA phase-out and the qualified business income (QBI) deduction.
The 2026 SEP-IRA contribution limit is $72,000, or up to 25% of eligible compensation, whichever is less. The compensation ceiling is $360,000. For self-employed workers, the effective rate works out to roughly 18.6% of net Schedule C profit because the calculation base is reduced by the SE tax deduction and the SEP contribution itself — IRS Publication 560 contains a worksheet to calculate the precise amount.
Yes. A SEP-IRA does not prevent you from contributing to a Roth IRA, provided your modified adjusted gross income is below the Roth phase-out thresholds for 2026. If your income exceeds those limits, the backdoor Roth IRA strategy lets high earners access Roth savings alongside a SEP. The SEP contribution itself reduces your MAGI, which can restore or expand Roth IRA eligibility in borderline income years.
No. Self-employment tax is computed on net Schedule C profit before retirement plan deductions are applied. Funding a SEP-IRA reduces your ordinary federal and state income tax, but it has no effect on SE tax. The deduction for half of SE tax is a separate above-the-line reduction that feeds into the SEP contribution calculation — but the SEP contribution itself does not reduce the SE tax base.
SEP-IRA contributions are due by the employer's tax-return deadline, including extensions. For sole proprietors and single-member LLCs filing Form 1040, that is April 15 without extension and October 15 with a Form 4868 extension. For partnerships, September 15 with extension. For S-corporations, March 15 with extension. You can establish a brand-new SEP plan retroactively up to that extended deadline — unlike a SIMPLE IRA, which must be adopted by October 1 of the plan year.
If you hire employees who meet the eligibility requirements — age 21 or older, worked for you in at least 3 of the last 5 years, and earned at least $750 in 2026 — you must contribute the same percentage of their W-2 compensation to a SEP-IRA in their name as the percentage you contribute for yourself. If you put in 15% for yourself, you owe 15% of each eligible employee's wages into their individual account. This mandatory pro-rata coverage is why many small business owners with growing teams switch to a SIMPLE IRA or 401(k) as they hire.