What a SEP-IRA actually is
A SEP-IRA is a retirement plan designed for self-employed people and small employers. The name stands for Simplified Employee Pension, and simple is the point. There is no annual filing, no plan document that needs updating every year, no audit at a certain asset level. You open the account, fund it, and deduct the contribution.
Contributions are made by the employer only. For a sole proprietor, the employer and the employee are the same person. For a small firm with staff, the employer funds a SEP for every eligible employee at the same percentage the owner takes for themselves. That uniformity rule is both the SEP's greatest feature and its biggest constraint.
The contribution math is roughly twenty-five percent of compensation, with a specific adjustment for self-employment tax if you are a sole proprietor. The IRS publishes an annual dollar ceiling that rises most years. Inside that ceiling, the SEP can move a lot of money in a good year.
SEP-IRA vs Solo 401(k) vs SIMPLE IRA
Three plans, three audiences. Picking the right one is almost always about the size of the firm and the math of a typical year.
| Feature | SEP-IRA | Solo 401(k) | SIMPLE IRA |
|---|---|---|---|
| Best for | Sole proprietors, very small firms with few employees | Self-employed with no staff other than a spouse | Firms with up to 100 employees who want a simple payroll plan |
| Who contributes | Employer only | Employer and employee (you are both) | Employee deferrals plus employer match or nonelective |
| Contribution ceiling at moderate income | Capped by the 25% rule | Usually higher — the employee deferral adds on top of the profit share | Lower than both, but simpler to administer |
| Roth option | Roth SEP is allowed after Secure 2.0 but rarely offered | Yes, including a designated Roth inside the plan | Roth SIMPLE is now allowed under Secure 2.0 |
| Interaction with backdoor Roth | SEP balance blocks clean backdoor Roth contributions via the pro-rata rule | 401(k) balances do not count in the pro-rata math | SIMPLE balances count the same as SEP balances |
| Employee eligibility | Employer must fund for anyone meeting the plan's eligibility rules at the same percentage | Only the owner and spouse — cannot cover other employees | All eligible employees must be offered the plan |
| Deadlines | Can be opened and funded up to the tax filing deadline including extensions | Plan must exist by year-end for employee deferrals, though employer contributions follow the SEP deadline | Must be set up by October 1 for the current year |
Two sole proprietors with the same net income can land in different plans for reasons that have nothing to do with the income itself. We work through the grid in plain language at the first meeting.
How the math actually works for a sole proprietor
The twenty-five percent rule sounds straightforward and is not. For a sole proprietor filing Schedule C, the calculation starts with net self-employment income, subtracts half the self-employment tax, and then applies a twenty-percent multiplier — not twenty-five — because the twenty-five percent is of compensation after the SEP contribution itself, which creates a circular-reference problem the IRS solved years ago with the twenty-percent shortcut.
The result is that a consultant netting one hundred and fifty thousand dollars after self-employment tax does not get a thirty-seven-thousand-five-hundred-dollar SEP contribution. The real number is closer to twenty-eight thousand. Solo operators are usually surprised by that gap, which is one of the reasons the Solo 401(k) comes up in the same conversation.
For small firms with W-2 employees, the math is cleaner. The owner picks a contribution percentage, and the firm funds that same percentage for every eligible employee. If the owner wants to put away twenty percent for themselves, they are funding twenty percent for the bookkeeper too.
The SEP contribution also interacts with the personal IRA question in ways most people do not expect. Our page about how the deduction phase-out works for households with a workplace plan covers the other half of the decision.
Self-employed households usually need a plan that covers more than the retirement account. The SEP conversation fits inside the broader work of turning business income into a reliable retirement — and the broader plan for the business itself is a separate conversation entirely.
For founders and small employers, the retirement plan is only one piece of the picture. The rest of it lives alongside the way we work with business owners across cash flow, succession, and the personal balance sheet.
What working with us looks like
First meeting — the business and the math
We meet in person in Paramus, at your office, or wherever your business actually runs. Bring the last two years of tax returns and a rough sense of where this year is headed. In an hour we can usually tell whether a SEP, a Solo 401(k), or a SIMPLE is the right tool — and whether any other account should sit alongside it.
Second meeting — the written plan and the setup
You leave with a written recommendation and a contribution target for the current year. If we set up the plan together, we do it with you — not at you — and we answer the administrator's questions for you so you do not have to become a retirement-plan specialist to fund your own.
A note on fit
When this might not be right for you
A SEP-IRA is not the right answer for every self-employed household. Some of the situations where we would redirect you:
- Self-employed households trying to do a backdoor Roth contribution. The SEP balance will quietly break the strategy through the pro-rata rule.
- Small firms with a few W-2 employees and an owner who wants to save aggressively without contributing proportionally for staff. A 401(k) with a safe-harbor design usually fits better.
- Anyone who wants a commissioned salesperson to open the plan in exchange for funding an annuity. We do not operate that way.
If the SEP is right, it is a simple, clean account. If it is not, we will tell you before you open one.
Frequently asked questions
What is a SEP-IRA and who is it for in New Jersey?
A SEP-IRA is a retirement plan funded entirely by the employer, designed for self-employed people and small employers. It allows contributions of up to roughly 25% of compensation, capped by an annual IRS limit. It is best for sole proprietors and very small firms that want a simple plan with no annual filing.
How much can I contribute to a SEP-IRA in 2026?
Employer contributions can be up to 25% of eligible compensation, up to an IRS annual ceiling that rises most years. For a sole proprietor, the effective rate after the self-employment tax adjustment works out to roughly 20% of net earnings. We confirm the current year dollar cap at the meeting.
SEP-IRA or Solo 401(k) — which is better for a sole proprietor?
At moderate income a Solo 401(k) usually lets you save more, because it combines an employee deferral with an employer profit share. At high income the two plans converge. A Solo 401(k) also avoids the backdoor Roth pro-rata problem that SEP balances create. We run the real numbers for your business before recommending one over the other.
Can I contribute to a SEP-IRA and a traditional IRA in the same year?
Yes. The SEP-IRA is an employer contribution, and the traditional IRA is a separate personal contribution with its own limit. Being covered by a SEP counts as being covered by a workplace plan for deduction phase-out purposes, which may limit the deductibility of the traditional IRA contribution.
Do I have to contribute to my employees' SEP-IRAs?
If your firm has employees who meet the plan's eligibility requirements, you must fund the SEP for them at the same percentage of compensation you fund for yourself. This uniformity rule is the SEP's main constraint and is why firms with several employees often choose a different plan.
What is the deadline to open and fund a SEP-IRA?
A SEP can be established and funded as late as the due date of your tax return for the year, including extensions. For a sole proprietor on extension, that is October 15 of the following year. The deadline flexibility is one of the reasons the SEP remains popular for self-employed households with variable income.