Quick answer: A SEP-IRA (Simplified Employee Pension) lets self-employed individuals and small business owners contribute up to 25% of W-2 compensation or roughly 20% of net self-employment income — with a 2024 cap of $69,000. Contributions are deductible, go into a traditional IRA-style account, and can be made as late as your tax filing deadline including extensions. If you have employees, you must contribute the same percentage for all eligible workers.
Contribution Rules and Real Numbers
For a sole proprietor or single-member LLC, the IRS formula is a bit circular: you contribute 20% of net self-employment income after deducting the contribution itself. On $200,000 net SE income, the maximum SEP contribution is about $37,000. For an S-corp owner, it's 25% of W-2 wages paid by the corporation — at $100,000 in W-2 income, that's a $25,000 contribution. The SEP is funded entirely by the employer; unlike a Solo 401(k), there is no separate employee deferral. This makes the Solo 401(k) better at lower income levels, and the SEP simpler if you have employees or want zero paperwork.
Why SEP-IRAs Are Popular for Small Businesses
Setup takes about 15 minutes with IRS Form 5305-SEP or through any major brokerage. There are no annual filing requirements (no Form 5500), no vesting schedules, and you can skip contributions in lean years — flexibility that suits seasonal or variable-income businesses. Each eligible employee gets their own SEP-IRA account, and the employer contributes the same percentage to every employee who earned at least $750 in any three of the last five years and is at least 21. This can get expensive if you have several employees, which is why solo operators benefit most.
SEP-IRA vs. Solo 401(k) — When to Use Which
If you have no employees and earn under about $130,000 in net SE income, a Solo 401(k) typically allows larger contributions because of the separate $23,000 employee deferral. Above that income level, or if you have employees, the SEP's simplicity often wins. There is no Roth SEP option (unlike a Solo 401(k)), and you can't take a loan against a SEP-IRA. SECURE 2.0 now allows Roth contributions to SEP accounts starting in 2023 if the plan document permits — ask your brokerage. Consult a CPA to determine which plan maximizes your deduction for your specific income and entity structure.
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