Simplified Employee Pensions (SEPs) — How Much Can I Contribute?: Retirement Plans for Business Owners (2025 IRS Guide)

This guide covers “Simplified Employee Pensions (SEPs) — How Much Can I Contribute?” within retirement plans for business owners. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 560 (2025), Retirement Plans for Small Business, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

• Setting up a SEP

• How much can I contribute

• Deducting contributions

• Salary reduction simplified employee pensions (SARSEPs)

• Distributions (withdrawals)

• Additional taxes

• Reporting and disclosure requirements

Publications

• 590-A Contributions to Individual Retirement Arrangements (IRAs)

• 590-B Distributions from Individual Retirement Arrangements (IRAs)

• 3998 Choosing a Retirement Solution for Your Small Business

• 4285 SEP Checklist

• 4286 SARSEP Checklist

• 4333 SEP Retirement Plans for Small Businesses

• 4336 SARSEP for Small Businesses

• 4407 SARSEP—Key Issues and Assistance

Forms (and Instructions)

• W-2 Wage and Tax Statement

• 1040 U.S. Individual Income Tax Return

• 1040-SR U.S. Tax Return for Seniors

• 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

• 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement

• 8880 Credit for Qualified Retirement Savings Contributions

• 8881 Credit for Small Employer Pension Plan Startup Costs

A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan.

Under a SEP, you make contributions to an individual retirement arrangement (called a SEP IRA) set up by or for each eligible employee. A SEP IRA may either be a traditional IRA (a traditional SEP IRA) or a Roth IRA (a Roth SEP IRA). A SEP IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP IRA is maintained.

SEP IRAs are set up for, at a minimum, each eligible employee (defined below). A SEP IRA may have to be set up for a leased employee (defined in chapter 1), but doesn't need to be set up for excludable employees (defined later).

Simplified Employee Pensions (SEPs) — How Much Can I Contribute?

The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP IRA. If you are self-employed, you can contribute to your own SEP IRA. Contributions must be in the form of money (cash, check, or money order). You can't contribute property. However, participants may be able to transfer or roll over certain property from one retirement plan to another. See Pubs. 590-A and 590-B for more information about rollovers.

You don't have to make contributions every year. But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). When you contribute, you must contribute to the SEP IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made.

Contributions are deductible within limits, as discussed later, and generally aren't taxable to the plan participants.

Employer contributions to a SEP IRA won’t affect the amount an individual can contribute to a Roth or traditional IRA.

Unlike regular contributions to a traditional IRA before 2020, contributions under a SEP can be made to participants over age 70½. If you are self-employed, you can also make contributions under the SEP for yourself even if you are over age 70½. Participants age 73 or over must take required minimum distributions (RMDs).

Time limit for making contributions.

To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year.

Contribution Limits

Contributions you make for 2025 to a common-law employee's SEP IRA can't exceed the lesser of 25% of the employee's compensation or $70,000. Compensation generally doesn't include your contributions to the SEP. The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants.

Example.

Your employee has earned $21,000 for 2025. The maximum contribution you can make to your employee’s SEP IRA is $5,250 (25% (0.25) x $21,000).

Contributions for yourself.

The annual limits on your contributions to a common-law employee's SEP IRA also apply to contributions you make to your own SEP IRA. However, special rules apply when figuring your maximum deductible contribution. See Deduction Limit for Self-Employed Individuals, later.

Annual compensation limit.

You can't consider the part of an employee's compensation over $350,000 when figuring your contribution limit for that employee. However, $70,000 is the maximum contribution for an eligible employee. These limits increase to $360,000 and $72,000, respectively, in 2026.

Example.

Your employee has earned $260,000 for 2025. Because of the maximum contribution limit for 2025, you can only contribute $70,000 to your employee’s SEP IRA.

More than one plan.

If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $70,000 or 100% of the participant's compensation. When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain.

Tax treatment of excess contributions.

Excess contributions are your contributions to an employee's SEP IRA (or to your own SEP IRA) for 2025 that exceed the lesser of the following amounts.

• 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment).

• $70,000.

Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to their SEP IRA. For more information on employee tax treatment of excess contributions, see Pub. 590-A.

Reporting.

For contributions to a traditional SEP IRA, don’t include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later).

For contributions to a Roth SEP IRA, contributions made under a salary reduction arrangement should be reported on Form W-2 (discussed later), while employer matching and nonelective contributions should be reported in boxes 1 and 2a of Form 1099-R using code 2 or 7 in box 7 and check the IRA/SEP/SIMPLE checkbox.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 560 (2025), Retirement Plans for Small Business: Simplified Employee Pensions (SEPs) — How Much Can I Contribute? — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.