Quick guide · 3 min read
SEP IRA
A SEP IRA is the simplest retirement plan for business income. It takes minutes to open, has no annual filing, and can be set up and funded as late as your business's tax-filing deadline, including extensions.
That makes it a useful last-minute tool. It is not always the plan that gives the biggest deduction, so we compare it with a solo 401(k) before you choose.
- Who it fits
- Self-employed people and small businesses with few or no employees.
- Usually not a fit
- Owners who want Roth contributions or the largest possible contribution at lower incomes; a solo 401(k) is usually better.
- Figures
- 2026 tax year
The key rule
The business can contribute up to 25% of each eligible person's pay (about 20% of net self-employment earnings for sole proprietors), up to $72,000 for 2026. Pay above $360,000 is not counted.
4 steps
Open the account
Open a SEP IRA at your brokerage and sign the plan document. IRS Form 5305-SEP works for most businesses; keep it with your records.
Calculate the contribution
For S corp owners, only W-2 wages count, not distributions. For sole proprietors and partners, the calculation starts from net self-employment income minus half of self-employment tax. We calculate the maximum for you.
Cover eligible employees
Employees who are 21 or older, worked for you in three of the last five years and earned more than a small threshold must receive the same percentage you give yourself.
Fund it by the deadline
Contribute by the business's filing deadline, plus extensions. Tell us the amount and the tax year it is for.
Example
An S corp owner
You pay yourself a $150,000 salary. The S corp can contribute up to 25%, or $37,500, to your SEP IRA. A solo 401(k) could allow $24,500 more as an employee deferral on top.
Common mistakes
- A SEP IRA balance counts toward the pro-rata rule for backdoor Roth conversions.
- Contributing for yourself but not for eligible employees.
Key dates
- Business filing deadline, plus extensions
- Last day to open and fund for the prior year.
Questions we hear
Can I have a SEP IRA and a 401(k) at my day job?
Yes. Your day-job 401(k) does not reduce the SEP contribution from your own business.
Can SEP contributions be Roth?
Newer rules allow Roth SEP contributions where the provider supports them. They are taxed as income in the year made.
What to send us
- Contribution confirmation
- The tax year the contribution applies to
Upload them to your client portal.
General education for TaxSquad clients, not advice for your situation. Rules and figures change. Talk to us before acting on this guide.