A SEP IRA is built for people who earn money on their own: freelance designers, consultants, gig workers with a side business, independent contractors who get a 1099 instead of a W-2, and owners of small companies with few or no employees. If that describes you and your only retirement savings so far is a personal IRA capped at a few thousand dollars a year, a SEP lets you put away far more, with almost no paperwork.
Key takeaways
- For 2026, total SEP contributions for one person can reach the lesser of 25% of compensation or $72,000, according to the IRS.
- Self-employed people effectively contribute about 20% of net self-employment earnings once the math is done properly.
- You can open and fund a SEP as late as your tax-filing deadline, including extensions, and still deduct it for the prior year.
- If you hire employees, you must contribute the same percentage of pay for every eligible worker that you contribute for yourself.
What a SEP IRA actually is
SEP stands for Simplified Employee Pension. Legally it is an employer plan, but the money lands in an IRA in your name, held at a brokerage or bank you choose. As a freelancer you are both the employer and the employee. Only the “employer” side contributes; there is no separate employee deferral like in a 401(k).
Contributions are tax-deductible, the investments grow tax-deferred, and withdrawals in retirement are taxed as ordinary income, the same way a traditional IRA works. Withdrawals before 59½ generally face a 10% additional tax unless an exception applies. Since SECURE 2.0, providers may also offer a Roth option for SEP contributions, though availability varies and Roth contributions are not deductible.
The IRS describes the plan’s rules on its SEP plan page, including the 2026 limits.
How much you can put in for 2026
The headline limit is 25% of compensation, up to $72,000. Compensation that counts toward the calculation is capped at $360,000 for 2026. For someone on a W-2 from their own corporation, the 25% applies directly to salary.
For sole proprietors and single-member LLCs filing Schedule C, “compensation” means net earnings from self-employment after two adjustments: subtracting half of your self-employment tax and subtracting the SEP contribution itself. Because the contribution reduces the base it is calculated on, the 25% rate works out to an effective 20% of net profit after the half-SE-tax deduction.
A hypothetical freelancer’s math
Say a freelance copywriter has $90,000 of net profit on Schedule C in 2026.
- Self-employment tax is figured on 92.35% of profit: $90,000 × 0.9235 × 15.3% ≈ $12,717.
- Half of that is deductible: about $6,358.
- Adjusted net earnings: $90,000 − $6,358 = $83,642.
- Maximum SEP contribution: $83,642 × 20% ≈ $16,728.
That is several times what a regular IRA allows, and every dollar is deductible. The IRS worksheet in Publication 560 walks through the same steps; tax software does it automatically.
SEP IRA vs. the other options
A SEP is the simplest of the self-employed plans, but not always the one that lets you save the most.
| Feature | SEP IRA | Solo 401(k) | Traditional/Roth IRA |
|---|---|---|---|
| 2026 limit | 25% of comp, max $72,000 | $24,500 employee deferral plus employer share, max $72,000 before catch-up | $7,500 ($8,600 at age 50+) |
| Catch-up contributions | No | Yes, from age 50 | Yes |
| Can cover employees | Yes, required if eligible | No (owner and spouse only) | Personal only |
| Annual filing | None | Form 5500-EZ once assets exceed $250,000 | None |
| Loans | No | If the plan allows | No |
The key difference shows up at lower incomes. Because a solo 401(k) adds a flat employee deferral on top of the employer contribution, our hypothetical copywriter could put away roughly $24,500 more in a solo 401(k) than in a SEP. Our solo 401(k) guide runs that comparison in detail. A SEP wins on simplicity, on late setup and when you have employees you want to cover.
You can still contribute to your own traditional or Roth IRA in the same year you fund a SEP, subject to the usual income limits for Roth contributions and deductibility rules for traditional ones.
The employee rule that surprises people
Once you hire, a SEP gets more expensive. You must contribute for every employee who meets your plan’s eligibility terms, and the contribution must be the same percentage of pay you give yourself. If you contribute 20% for yourself, an eligible assistant earning $40,000 gets $8,000.
The plan can limit eligibility to employees who are at least 21, have worked for you in at least three of the last five years, and earned at least $800 from you in 2026. You cannot set stricter conditions than those. Employer contributions are immediately 100% vested, so the money belongs to the employee right away.
Part-time help paid as independent contractors does not count as employees for this purpose, but classifying someone as a contractor has to hold up under the normal IRS rules.
Opening one
- Pick a provider. Most large brokerages offer SEP IRAs with no account fee and access to low-cost index funds and ETFs.
- Adopt the plan document. Many providers use IRS Form 5305-SEP or their own prototype. You sign it and keep it in your records; nothing gets filed with the IRS.
- Open the SEP IRA account in your name (and one for each eligible employee, if any).
- Calculate the contribution once your profit for the year is known. Many freelancers wait until they prepare their taxes.
- Fund it by your deadline, which is your return’s due date including extensions. Tell the custodian which tax year the deposit is for.
- Invest the cash. A diversified index fund or a target-date fund is a reasonable default for most people.
Contributions are flexible from year to year. In a slow year you can put in less, or nothing at all.
Common questions
Can I have a SEP IRA and a 401(k) at my day job?
Yes. A SEP funded from side-business income is separate from your employee deferrals at work. The $72,000 total limit applies per employer, though your 401(k) employee deferrals are shared across all plans you participate in.
Do I have to contribute every year?
No. You decide each year, and you can skip a year entirely. The only rule is that when you do contribute, eligible employees get the same percentage.
Can I roll a SEP IRA into another account later?
Yes. A SEP IRA can be rolled into a traditional IRA or, if the receiving plan accepts it, into a 401(k). That can be useful if you later switch to a solo 401(k) or rejoin an employer plan.
Is there a catch-up contribution for people over 50?
Not within the SEP itself. Older freelancers who want catch-up room usually look at a solo 401(k) instead.
