How Much Can I Contribute to a SEP if I Have a 401k?
For those with a 401(k) and self-employment income, the contribution rules for each plan are largely independent, creating a unique savings opportunity.
You can contribute to both a Simplified Employee Pension (SEP) IRA and a 401(k) plan in the same year. A SEP IRA is a retirement plan for self-employed individuals and small businesses, while an employer sponsors a 401(k). Navigating the contribution rules for both plans is useful for individuals with a traditional job and a side business.
Understanding Individual Plan Contribution Limits
A 401(k) plan allows contributions from the employee and employer. As an employee, you can make elective deferrals up to an annual limit, which is $23,500 for 2025. If you are age 50 or over, you can make an additional catch-up contribution of $7,500. For those aged 60 to 63, this catch-up limit increases to $11,250.
Beyond your own contributions, there is an overall limit for total additions to a 401(k). This includes your elective deferrals, any employer matching contributions, and other employer contributions. For 2025, this total limit is the lesser of 100% of your compensation or $70,000.
A SEP IRA has different rules, as only the employer can contribute. If you are self-employed, you act as both the employee and employer, and your contributions are considered employer contributions. These are limited to 25% of your net adjusted self-employment income, up to a maximum of $70,000 for 2025. The compensation used for this calculation is also capped at $350,000 for 2025.
How Plan Limits Interact for Unrelated Employers
When you work a W-2 job and run a separate business, the two are considered unrelated employers. This means the retirement plan limits are applied separately to each entity. You have one set of limits for your 401(k) with your W-2 employer and a separate set for the SEP IRA from your business.
The limit on your personal, elective deferrals to a 401(k) is a per-individual limit. The IRS sets a maximum amount you can contribute from your salary each year, regardless of how many employers you have. You must spread this limit across all 401(k) or similar plans you participate in; you cannot contribute the maximum to each.
In contrast, the overall contribution limits, which include employer amounts, are applied on a per-plan basis for unrelated employers. This means your W-2 employer’s 401(k) has its own overall limit. Your self-employment SEP IRA has its own separate overall limit, and the two do not impact each other.
An exception involves “controlled groups” or “affiliated service groups.” These are businesses with sufficient common ownership or inter-service relationships that the IRS treats them as a single employer for retirement plan purposes. In these cases, the contribution limits are combined and cannot exceed the single-employer maximum.
Calculating Your Combined Maximum Contribution
To determine your total potential retirement savings, first decide on your employee contribution to your 401(k) plan, up to the annual maximum plus any applicable catch-up amount.
Next, calculate your maximum SEP IRA contribution based on your self-employment earnings. To do this, you must first determine your net adjusted self-employment income. This figure is your gross self-employment income minus one-half of your self-employment taxes.
Once you have your net adjusted self-employment income, you can calculate your maximum SEP IRA contribution. The effective contribution rate for a self-employed individual is 20% of this income. For example, if an individual has $60,000 in net adjusted self-employment income, their SEP IRA calculation is separate. They could contribute up to 20% of $60,000, which is $12,000, to their SEP IRA.
This brings their total retirement contributions for the year to $35,500 ($23,500 to the 401(k) and $12,000 to the SEP IRA), plus any employer match. Each plan’s total contributions must remain within the overall per-plan limit, and since the plans are unrelated, they each have their own ceiling.
Tax Reporting for Your Contributions
Contributions you make as an employee to a traditional 401(k) are made on a pre-tax basis. This means the amount you contribute is subtracted from your gross pay before income taxes are calculated, lowering your taxable income. This information is reflected on your Form W-2, where your taxable wages in Box 1 are already reduced by your 401(k) deferrals.
Your employer’s contributions to your 401(k), such as matching funds, are also not considered part of your taxable income for the year. You will not see these amounts added to your W-2 wages, which simplifies the process as there is no separate deduction to claim.
Contributions made to your SEP IRA are reported differently. As the “employer” for your self-employment activities, you take the deduction directly on your personal tax return. This is done on Schedule 1 of Form 1040. The total amount of your SEP IRA contribution acts as an above-the-line deduction that lowers your adjusted gross income (AGI).