The SEP IRA: An Easy Retirement Option for Small Business Owners
- Marc Lowe
- Jun 4
- 5 min read
Over the years, I have helped self-employed professionals and small business owners save for retirement. One of the most common accounts implemented was a SEP IRA (Simplified Employee Pension Individual Retirement Account). It has its benefits and its drawbacks, just like any retirement account, but I found this one to hit a sweet spot for people who want a simple option that allows the business owners to save in a tax-advantaged way and contribute more than traditional IRAs or Roth IRAs. In fact, the SEP IRA comes in handy when an owner or employee can supplement it with contributions to those types of accounts.
With its easy to setup capability and high contribution limits, it makes an easy retirement option for small business owners who make these qualities a priority. For employees, they love that they get ownership on the contributions made by the employer right away and can be a deciding factor in working with you or a different company. Although there are some limitations discussed in this article, I also want to point out that there are additional considerations like the custodian you use to open the account with. Some custodians make it easier to fund the SEP IRAs and some make it a little more difficult, so researching this is important before making any type of decision on opening a SEP IRA.
Whether you’re a solo entrepreneur or have a few employees, here’s what you need to know about the SEP IRA rules for 2025.
Who Can Use a SEP IRA?
SEP IRAs are available to a wide range of business owners:
Sole proprietors
Partnerships
LLCs
Corporations (including S corps)
Even if you don’t have employees, you can set up a SEP IRA to contribute toward your own retirement. If you do have employees, you’ll need to make contributions for them as well (more on that below).
Employee Eligibility Requirements
If you’re making contributions for employees, the IRS requires you to include all employees who meet these three criteria:
Are at least 21 years old
Have worked for you in at least 3 of the last 5 years
Earned at least $750 in compensation in 2025
You can choose to make your eligibility requirements more generous (e.g., younger employees, fewer years of service), but you can’t make them more restrictive than these federal guidelines.
SEP IRA Contribution Rules for 2025
One of the biggest advantages of a SEP IRA is the generous contribution limit. Here's how it works:
💰 Contribution Limits
You can contribute up to 25% of compensation (for employees only), up to a maximum of $71,000 per person in 2025.
For self-employed individuals, the contribution is capped at 20% based on net earnings from self-employment, after subtracting half of your self-employment tax and the SEP contribution itself (yes, it’s a little recursive—but there’s an IRS worksheet to help).
Example: SEP IRA Contribution for a Self-Employed Person
Let’s say Jamie is a self-employed consultant who made $100,000 in net income (after business expenses).
Step 1: Calculate Self-Employment Tax
First, Jamie needs to calculate the self-employment tax (which is roughly 15.3% of 92.35% of net income):
92.35% of $100,000 = $92,350
Self-employment tax = 15.3% × $92,350 = $14,121.55
Step 2: Deduct Half of Self-Employment Tax
Jamie can deduct half of that ($14,121.55 ÷ 2 = $7,060.78) when calculating her SEP contribution base.
Step 3: Calculate Adjusted Net Earnings
$100,000 – $7,060.78 = $92,939.22
Step 4: Apply SEP Contribution Rate
The maximum SEP IRA contribution is 20% of adjusted net earnings for self-employed individuals (not 25% like it is for employees).
20% × $92,939.22 = $18,587.84
So, Jamie can contribute approximately $18,587 to her SEP IRA for the year.
It’s a bit circular because the SEP contribution itself slightly reduces the income base for calculating the contribution. Check out the IRS website for more information
⚖️ Equal Percentage Rule
You must contribute the same percentage of pay for all eligible employees—including yourself. If you contribute 15% of your compensation to your SEP IRA, you must contribute 15% of each eligible employee’s compensation to their SEP IRA as well.
🧾 Tax Deductible Contributions
All contributions you make to a SEP IRA are tax-deductible as a business expense, potentially lowering your overall tax bill for the year.
Key Deadlines for 2025
Timing matters. Fortunately, SEP IRAs offer some of the most flexible deadlines in retirement planning:
Plan Establishment Deadline: You can set up a SEP IRA as late as your tax filing deadline, including extensions. For most businesses, that means you have until October 15, 2026 if you file for an extension.
Contribution Deadline: You have until the same tax filing deadline (including extensions) to make your contributions for 2025.
Vesting, Portability, and Flexibility
Another reason SEP IRAs are so popular? Simplicity and ownership.
100% Immediate Vesting: Employees own the funds in their SEP IRA accounts right away—no vesting schedules or waiting periods.
Fully Portable: If an employee leaves your company, they take the entire SEP IRA balance with them.
No Annual Filing: You don’t need to file annual reports with the IRS, unlike traditional 401(k) plans.
SEP IRA Limitations to Know
While SEP IRAs offer some powerful benefits, they’re not perfect for every situation:
❌ No Roth Option: Contributions are always pre-tax; there’s no way to make Roth (after-tax) contributions in a SEP IRA.
❌ No Catch-Up Contributions: Unlike IRAs or 401(k)s, SEP IRAs don’t allow additional contributions if you’re over age 50.
❌ Same Contribution Rate for Employees: You can’t contribute more to your own SEP IRA than you contribute for your eligible employees on a percentage basis.
Final Thoughts: Is a SEP IRA Right for You?
If you're self-employed or run a small business with no (or very few) employees, a SEP IRA can be an excellent way to:
Save aggressively for retirement
Reduce your taxable income
Avoid the administrative complexity of traditional retirement plans
But if you're looking for Roth contributions, employee salary deferrals, or the ability to borrow from your plan, you may want to compare the SEP IRA with a Solo 401(k). That is coming up in one of our next articles.
At In The Money Retirement, we help small business owners and independent professionals build tax-smart, lifestyle-aligned retirement strategies. If you’re wondering whether a SEP IRA fits into your financial plan, we can help you weigh your options and structure the most efficient path forward.
📞 Ready to Take Action?
Contact us today to schedule your free retirement planning consultation.
About The Author
Marc Lowe is the Founder & President of In The Money Retirement Planning. He is a Certified Financial Planner and member of NAPFA National Association of Personal Financial Advisors, XY Planning Network & Fee-Only Network. He works with retirees and those approaching retirement. He has over a decade of experience helping these folks grow their net worth, organize their finances and build better lives for themselves and their families.
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