SEP IRA

What a SEP IRA is

A SEP is a written arrangement, often adopted with IRS Form 5305-SEP, under which the employer contributes to traditional IRAs set up for the owner and each eligible employee. Employees cannot make salary deferrals to a SEP and there are no catch-up contributions. The employer decides each year whether to contribute.

Why it matters to employers

A SEP is simple to run: there is no annual Form 5500 and no nondiscrimination testing. The cost of that simplicity is that the contribution must be the same percentage of pay for every eligible employee, including the owner. If you give yourself 15%, every eligible employee gets 15%, fully vested at once.

An employee is eligible once they are 21, have worked for you in three of the last five years and earned at least $800 from you in 2026. You can set looser rules but not stricter ones.

For 2027 the cap rises to $75,000, on up to $375,000 of pay. (IRS Notice 2026-66)

Example with 2026 figures

An owner pays herself $200,000 and has two eligible employees earning $60,000 and $45,000. A 10% SEP contribution costs $20,000 for the owner plus $6,000 and $4,500 for the employees. Only the first $360,000 of pay counts in 2026.

Common mistakes

• Leaving out part-time or former employees who met the eligibility rules during the year.

• Using different percentages for the owner and staff.

• Expecting employees to be able to save from their own pay. If that matters, a 401(k) or SIMPLE IRA is the fit.

• For self-employed owners, applying 25% to gross profit instead of using the reduced rate in IRS Publication 560.