SEP IRA Basics: What Employers and the Self-Employed Should Know
Published November 6, 2026
A simplified employee pension, or SEP, is a retirement plan that an employer can set up with little paperwork. The employer makes contributions to a SEP IRA for each eligible employee. A self-employed person can set one up for himself or herself. This guide is general information. It is not advice about your retirement plan or your return.
How a SEP works
Publication 560 says a SEP is a simplified way for an employer to contribute to employees' retirement accounts. The contributions go into a traditional SEP IRA or a Roth SEP IRA. The money is held by a bank, insurance company, or other qualified institution. Under a SEP, the employer makes the contributions.
Employer contributions to a SEP IRA do not reduce the amount an employee can put into a Roth or traditional IRA. Publication 560 says so directly.
Who must be included
Publication 560 lists the rules for an eligible employee. The employee must be at least 21. The employee must have worked for you in at least 3 of the last 5 years. The employee must have received at least $750 in compensation from you in 2025.
Some workers can be left out. Publication 560 gives two examples: employees covered by a union agreement that bargained for retirement benefits, and nonresident aliens who received no U.S. source wages from you.
Contribution rules
Contributions must be money, such as cash, a check, or a money order. You cannot contribute property. They must follow a written allocation formula, and they must not favor highly compensated employees. If you contribute, you must contribute for every eligible participant who worked during that year.
The annual limit for 2025 is the smaller of $70,000 or 25% of the employee's compensation. Publication 560 says you cannot count pay above $350,000 when you figure that limit. Self-employed people use a different calculation based on their net earnings from self-employment. Publication 560 explains that rule.
The deadline to set up a SEP
You can set up a SEP for a year as late as the due date of your income tax return for that year, including extensions. For example, an owner can set one up after the year ends, as long as it is before that due date.
Notice to employees
You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in those instructions. Publication 560 says a SEP is not treated as adopted until you give employees this information.
Taxes on the money
Publication 560 says SEP contributions are deductible for the employer within limits. They are generally not taxable to the people in the plan when they go in. If an employer contributes more than the limit, the excess is included in the employee's income for the year.
How a SEP compares with other plans
A SEP is one of several retirement plans for small businesses. Our guide to traditional IRA deduction basics covers an IRA you open yourself. Our guide to Roth and traditional IRA basics explains the difference between the two types. If you run a business alone, our guide to Schedule C business income and expenses explains how the business is reported.
Simple steps
- List each employee and check the age, service, and pay tests.
- Choose a financial institution and set up a SEP IRA for each eligible person.
- Give each eligible employee Form 5305-SEP and its instructions.
- Keep written records of the allocation formula and each contribution.
Upload your documents and answer a few simple questions. Your preparer reviews every deduction and credit and lets you know when your return is ready to sign.
Sources: Sources: IRS, Publication 560 (2025), Retirement Plans for Small Business (https://www.irs.gov/pub/irs-pdf/p560.pdf) This is general information, not advice about your specific return.
