SEP IRA Contribution Limits 2026: Why 25% Is Really 20%

You may contribute up to 25% of each eligible worker's compensation to a SEP IRA for 2026. However, this limit is also capped at $72,000 per individual. If you are self-employed with no W-2 wages, then that 25% is measured after two deductions and thus your actual limit would be around 20% in net self employment earnings rather than just 25% in profit.

That 20-versus-25 gap catches owners who multiply their profit by a flat quarter. Overshoot the real limit and the excess draws a 6% excise tax every year under Internal Revenue Code section 4973, so the self-employed math is worth getting right before you fund the account.

SEP IRA for Self Employed Owners: How Much Can You Contribute?

A SEP contribution made by a self-employed person will be limited to about 20% of net earnings from self-employment, not 25% of net profit as would be indicated by the headline 25% rate. For example if you are a sole proprietor who has $150,000 in net profits (Schedule C line 31) and have no employees, a flat quarter would suggest $37,500, but the IRS limits your contributions based on your "net earnings from self-employment" which is your Schedule C net profits less half of the amount you pay for self-employment taxes. Because the contribution reduces its own base, it turns out that using the 25%-of-compensation rate results in an effective rate of around 20%. At $150,000 in net profits, the limit is close to $27,000 to $28,000, so well below the $72,000 cap for 2026.^[1]

It is most obvious in terms of money that there is a difference (gap) between what we say and what we calculate:

A self-employed business owner never applies the clean 25% to net profit. Only a business that pays you W-2 wages (S Corp) will apply the full 25% to those wages directly. Excess funds in your own SEP are treated as an excess IRA contribution and you will be subject to a 6% excise tax under section 4973 each year the money remains in your account. Use the Publication 560 worksheet rather than eyeballing 25% of your net profit, and look at the self-employed IRA contribution limits guide for more information on how this works.

What are the SEP IRA contribution limits?

SEP contribution limits for an individual are determined by the lower of two amounts: 25% of that individual’s compensation, or $72,000 (the annual addition ceiling) for 2026 under Internal Revenue Code section 415(c).^[2] Only $360,000 of a person's compensation counts toward that 25% for 2026. Therefore, pay above that line will have no impact on your ability to make additional SEP contributions.^[1] Since these figures are adjusted for inflation, both figures typically move in most years.

Two other numbers establish the boundaries of this plan. The amount an employee earns must reach $800 for 2026 (the minimum compensation threshold) before contributing becomes your responsibility, and if they make less than that, then you will have no obligation to contribute anything toward their retirement account. In addition, a SEP provides no "catch-up" provision for owners over age 50 or those aged 60 to 63, unlike a SIMPLE IRA or a 401(k). The percentage ceiling is the whole story, which is why high earning owners often prefer a SEP and low income owners do not prefer them.

Described below is how the parts fit for 2026:

How do the limits work when you have employees?

Once you have hired employees, the contribution limit will be about all of your employees and no longer simply about you. The uniform percentage applies to a SEP. Therefore, if you want to make contributions as an employer for yourself (and thus use up some or all of your own contribution limits), you must also make employer contributions under the same percentage for each other eligible employee, into his/her own Traditional IRA account.^[3] Additionally, section 408(k) states that the most restrictive eligibility requirements that you can place on someone to participate in your SEP are age 21, worked in three out of the past five years and made at least the $800 minimum for 2026. This means that you cannot allow yourself (as an employer) to take advantage of 20% while allowing your employees to take advantage of 5%, which is exactly how a generous owner contribution becomes a large payroll expense.

The SEP IRA vs. SIMPLE IRA comparison demonstrates how small business owners (those who have several employees) are likely to shift to a SIMPLE, where the required outlay caps near 3% of pay as opposed to matching their own contribution rate dollar for dollar.

What is the SEP IRA funding deadline for 2026?

One of the best things about a SEP IRA is that you do not have to establish or fund the plan by December 31. When you need to fund the plan will depend on your type of business entity.^[4] For example, if you are a sole proprietor, you would need to fund by April 15 (Form 1040) but you have until October 15 (if you filed an extension). An S corp or Partnership would be funded earlier than a sole proprietor, as of March 15 (or Sept. 15 with an extension). As such, because accountants can open a new SEP IRA in the spring and cut a prior-year tax bill on the way in, a SEP IRA may appeal to small business owners who don't know how good their year was until March. A SIMPLE IRA cannot offer this option since it must be established by Oct. 1 of the plan year and thus is less flexible in terms of timing. To help with your decision-making process, small business retirement plans presents them side by side, and the mechanics live in what is a SEP IRA.

The Bottom Line

You may contribute no more than the lower of 25% of compensation, or $72,000 per person, into your SEP Individual Retirement Account for 2026. Net earnings from self-employment are reduced by half of your self-employment tax and by the contribution itself, which puts the real ceiling for a self-employed owner closer to 20%. Use the Publication 560 worksheet instead of taking 25% of your net profit and do not forget that you have until the extended filing deadline to make contributions.

This guide is educational and summarizes IRS rules for SEP IRA plans. It is not investment, legal, or tax advice. Your plan documents and current IRS limits control. Talk to your tax advisor about your business's circumstances.