What Business Owners and Self-Employed Individuals Need to Know
By Jessica I. Marschall, CPA, ISA AM ~ January 20th, 2025
Simplified Employee Pension Individual Retirement Accounts (SEP-IRAs) remain one of the most powerful retirement savings tools available to small business owners and self-employed individuals. With higher contribution limits than traditional IRAs and relatively simple administration, SEP-IRAs offer an attractive option for those seeking to maximize tax-advantaged retirement savings. The IRS has announced updated contribution limits for both 2025 and 2026, and understanding these changes is essential for effective tax and retirement planning.
2025 SEP-IRA Contribution Limits
For tax year 2025, employers may contribute up to 25% of each eligible employee’s compensation, with a maximum contribution of $70,000 per employee. This represents an increase from the 2024 limit of $69,000. It is critical to understand that SEP-IRA contributions are made exclusively by the employer and employees cannot make elective deferrals to a SEP-IRA as they might with a 401(k) plan.
For self-employed individuals, the calculation is somewhat more complex. Contributions are based on net earnings from self-employment, which requires adjusting gross business income for allowable deductions, including one-half of self-employment tax. The effective contribution rate for self-employed individuals works out to approximately 20% of net self-employment income after these adjustments, rather than a straightforward 25%.
2026 SEP-IRA Contribution Limits
Looking ahead to 2026, the IRS has established an increased maximum contribution limit of $72,000, maintaining the 25% of compensation threshold. This $2,000 increase reflects cost-of-living adjustments and provides additional retirement savings capacity for high-earning business owners and their employees.
Contribution Limit Comparison
| Tax Year | Maximum Contribution | Percentage of Compensation |
| 2024 | $69,000 | 25% |
| 2025 | $70,000 | 25% |
| 2026 | $72,000 | 25% |
Eligibility Requirements
Business owners establishing SEP-IRAs must extend coverage to all eligible employees. The IRS establishes minimum eligibility criteria, though employers may adopt less restrictive standards. Under the statutory framework, an employee must be included if they meet all of the following conditions: they have reached age 21; they have worked for the employer during at least three of the last five years; and they have received at least $750 in compensation from the employer during the year (for 2025).
Critically, the contribution percentage must be uniform across all eligible employees, including the business owner. If the owner contributes 15% of their own compensation, they must contribute 15% for every eligible employee as well. This requirement ensures that SEP-IRAs do not become vehicles for discriminatory benefit allocation.
Combining SEP-IRA with Individual IRA Contributions
Depending on plan design, individuals covered by a SEP-IRA may also be able to make personal contributions to a traditional IRA up to the annual limit. For 2025, the individual IRA contribution limit is $7,000, or $8,000 for individuals age 50 or older. For 2026, these limits increase to $7,500 and $8,600, respectively.
These individual contribution limits are separate from and in addition to the employer’s SEP-IRA contributions. However, the individual IRA limit is cumulative across all traditional and Roth IRA accounts—contributing the maximum to one account precludes additional contributions to other IRAs for that tax year. Self-employed individuals should work with their tax advisors to optimize the interplay between employer-level SEP contributions and individual IRA contributions.
Contribution Deadlines
One of the significant advantages of SEP-IRAs is the extended contribution deadline. Employers have until the due date of their business tax return, including extensions, to establish a SEP-IRA plan and make contributions for the prior tax year. For sole proprietors and single-member LLCs filing Schedule C, this means contributions for 2025 can be made as late as October 15, 2026, if a valid extension is filed. This flexibility allows business owners to assess their annual income and tax situation before committing to specific contribution amounts.
Tax Treatment and Benefits
Employer contributions to a SEP-IRA are deductible as a business expense, reducing the employer’s taxable income. For self-employed individuals, SEP contributions are taken as an adjustment to gross income on Form 1040. The contributions grow tax-deferred within the account, with taxation occurring only upon distribution in retirement.
Withdrawals made after age 59½ are taxed as ordinary income. Early withdrawals before this age are generally subject to a 10% penalty in addition to ordinary income tax, though certain exceptions apply. Required minimum distributions must begin at age 73 under current law.
Correcting Excess Contributions
If contributions exceed the allowable limits, prompt corrective action is essential. Excess contributions are included in the employee’s gross income and may be nondeductible for the business. The IRS Employee Plans Compliance Resolution System (EPCRS) provides mechanisms for correcting plan errors, including excess contributions. Business owners who discover contribution errors should consult with a tax professional immediately to determine the appropriate correction method and minimize potential penalties.
Planning Considerations
The increased contribution limits for 2025 and 2026 present valuable opportunities for business owners and self-employed individuals to accelerate retirement savings while reducing current tax liability. A well-structured SEP-IRA strategy can be particularly beneficial for businesses with variable income, given the flexibility to adjust contribution percentages annually between 0% and 25%.
Business owners should evaluate their SEP-IRA strategy in the context of their overall retirement planning objectives, workforce composition, and cash flow considerations. For businesses with multiple employees, the requirement to contribute equally for all eligible participants makes SEP-IRAs most cost-effective when the owner’s compensation significantly exceeds that of other employees.
As with all tax planning matters, individual circumstances vary. Consult with a qualified tax professional to determine how these contribution limits apply to your specific situation and to develop a retirement savings strategy that aligns with your long-term financial goals.
This article is provided for informational purposes only and does not constitute legal or tax advice. Tax laws and regulations are complex and subject to change. Readers should consult with qualified tax and legal professionals regarding their specific circumstances.
About the Author: Jessica I. Marschall, CPA, ISA AM, is President and CEO of MAS LLC, a tax advisory and small business valuation firm. With over 26 years of experience, she serves more than 400 clients annually and has authored over 150 articles on tax, valuation, and charitable contribution topics.
