SEP IRA: A Guide for the Self-Employed

TL;DR: A SEP IRA (Simplified Employee Pension) lets a self-employed person or small employer contribute up to the lesser of 25% of compensation or $72,000 for 2026, and the money comes entirely from the employer, with no employee salary deferrals and no catch-up contributions. Any employer, including a sole proprietor with no other staff, can set one up, and eligible employees must be included once they meet the plan’s age, service, and compensation tests.

What a SEP IRA is and who can open one

A SEP IRA is an employer-funded retirement plan that almost any employer can open, including a self-employed individual or sole proprietor working alone, because there is no minimum headcount or corporate structure required before the plan becomes available.

Any employer can establish a SEP, and that includes a self-employed individual or sole proprietor working alone. The Internal Revenue Service describes the mechanics plainly on its “Choosing a SEP-IRA Plan” guidance: a small business or sole proprietor can make employer contributions of up to 25% of each employee’s pay directly to an individual retirement account (IRA) set up for each eligible employee, including the business owner. That last detail matters. A one-person consulting business or freelance practice qualifies just as much as a firm with a payroll, and there is no minimum headcount or corporate structure required before a SEP becomes available.

The structural feature that separates a SEP IRA from a traditional or Roth IRA is who funds it. Every dollar in a SEP IRA is an employer contribution. There are no employee salary-deferral contributions and no age-50 catch-up contributions, a restriction the IRS states directly on its SEP contribution limits page. That makes a SEP IRA fundamentally different from a workplace 401(k), where the employee’s own paycheck deferral usually does most of the work, and it means the entire benefit of a SEP IRA rides on the business having enough profit in a given year to fund it. In a lean year, an employer can simply choose to contribute nothing, since there is no fixed annual commitment once the plan exists. For a broader map of how a SEP fits alongside Roth, traditional, and other account types, start with the IRA investing education hub.

Who must be included: SEP IRA eligibility rules

Not every worker has to be covered, but the eligibility rules are narrow, and an employer generally must include any employee who is at least age 21, has worked for the business in 3 of the last 5 years, and earned at least $800 in 2026.

An employer generally must include any employee who has reached age 21, has worked for the employer in at least 3 of the last 5 years, and has received at least $800 in compensation from that employer in 2026. That threshold comes from IRS Publication 560, which sets the 2026 compensation figure at $800 (up from $750 in 2025). An employer is allowed to adopt less restrictive eligibility terms, such as a lower age or a shorter service requirement, but cannot make the rules stricter than the IRS minimums.

For a self-employed person with no other workers, this section is mostly academic. The owner is the only eligible participant, and the compensation, age, and service tests are satisfied by definition. The eligibility rules start to matter the moment a sole proprietor hires even one part-time or seasonal worker who clears the age-21 and 3-of-5-years thresholds, because that worker becomes entitled to a SEP contribution on the same terms as the owner. Reviewing each new hire against these three tests once a year, rather than assuming a prior year’s roster still applies, is the simplest way a small employer avoids an eligibility mistake.

2026 SEP IRA contribution limits

The 2026 SEP IRA contribution limit is the lesser of 25% of a participant’s compensation or $72,000, with the compensation counted in that 25% calculation capped at $360,000 for the year.

For 2026, an employer’s SEP contribution on behalf of any one participant cannot exceed the lesser of 25% of that employee’s compensation or $72,000, a dollar cap that rose from $70,000 in 2025. This is the same defined-contribution dollar ceiling used elsewhere in the tax code for annual additions, and the increase to $72,000 for 2026 is confirmed on the IRS’s SEP contribution limits page.

The 25% calculation itself has a ceiling too. Compensation counted toward that percentage is capped at $360,000 for 2026, up from $350,000 the year before. In practical terms, once an owner’s or employee’s compensation crosses $360,000, additional pay above that figure does not increase the 25% calculation further, which is why the $72,000 dollar cap and the $360,000 compensation cap work together rather than independently. For a self-employed owner whose net earnings fluctuate year to year, the 25%-of-compensation side of the test is usually the binding constraint, not the $72,000 dollar figure, since most solo practices would need substantial compensation before the dollar cap becomes the limiting factor. Tracking these two figures against actual net earnings each year is worth doing carefully, and a page built for exactly that kind of running total is the contribution tracking tool.

How to set up and fund a SEP IRA

Setting up a SEP IRA is simpler than most employer plans, since it takes only a standard written plan agreement and a SEP-IRA account for each eligible participant, with no annual plan filing comparable to a full 401(k).

A SEP IRA requires a written plan agreement, which most brokerages and custodians provide as a standard, pre-approved document rather than something built from scratch, and a SEP-IRA account opened for each eligible participant, including the business owner. There is no annual filing requirement comparable to a full 401(k) plan, which is a large part of why sole proprietors and small employers with a handful of workers gravitate toward this structure over more administratively complex alternatives. Because the account itself is an IRA, the underlying custodial and investment mechanics work the same way they do for a traditional or Roth IRA, just with an employer-sized contribution flowing in.

Funding follows a simple pattern. The employer decides each year whether to contribute at all and how much, subject to the 25%-of-compensation and $72,000 dollar limits described above. Because SEP contributions are tied to the employer’s own tax filing, the exact funding deadline (generally the business’s tax return due date, including any extension) is worth confirming with a tax professional each year rather than assumed from memory, since it can shift with the entity’s filing status. That flexibility, deciding the amount and even whether to contribute at all after the business’s results for the year are known, is one of the more useful features for a self-employed person whose income varies year to year.

SEP IRA vs. the other self-employed options

A SEP IRA is not your only self-employed retirement option, and the right choice depends on whether you have other workers and how much you want to fund through salary deferral rather than employer contributions.

A SEP IRA competes for the same self-employed dollar with two other structures, and the right one depends on whether other workers are involved and how much of the contribution the owner wants to fund through salary deferral rather than employer profit. A SIMPLE IRA is built for a small employer that wants employees to defer their own pay in addition to receiving an employer match or nonelective contribution, which is a meaningfully different design than the SEP IRA’s employer-only funding. A Solo 401(k) is generally built for a business owner with no other eligible employees who wants to combine an employee-style salary deferral with an employer contribution inside a single plan.

Because the three structures solve different problems, the right comparison depends on the specific business situation rather than a single universal answer. Always consult your own legal, financial, and tax professionals before opening or changing a retirement account.

Frequently asked questions

What is a SEP IRA? A SEP IRA, or Simplified Employee Pension, is an employer-funded individual retirement account that lets a self-employed person or small business contribute on behalf of eligible workers, including the owner, without any employee salary deferrals.

What are the SEP IRA contribution limits for 2026? For 2026, the employer contribution on behalf of any one participant cannot exceed the lesser of 25% of that participant’s compensation or $72,000, with compensation for the 25% calculation capped at $360,000.

Can a self-employed person use a SEP IRA? Yes. Any employer can establish a SEP IRA, including a sole proprietor or self-employed individual working alone, and the IRS explicitly describes contributions made “directly to an IRA set up for each eligible employee, including yourself.”

What are the SEP IRA eligibility rules? An employer generally must include any employee who has reached age 21, has worked for the employer in at least 3 of the last 5 years, and has received at least $800 in compensation in 2026, though an employer may adopt less restrictive terms.

SEP IRA vs. Solo 401(k): which is better? Neither is universally better. A SEP IRA is funded entirely by employer contributions with no salary deferral, while a Solo 401(k) is generally built for an owner with no other eligible employees who wants to combine employee-style deferrals with an employer contribution in one plan. A closer side-by-side comparison lives on the Solo 401(k) page.

This article is educational information, not individualized tax, legal, or financial advice. Always consult your own legal, financial, and tax professionals before opening or changing a retirement account.

By Tim Schmidt + Sean Webster Reviewed by Sean Webster