What Is the Maximum SEP IRA Contribution?

A Simplified Employee Pension, or SEP IRA, is a retirement savings plan structured for self-employed individuals and small business owners. It allows for flexible, tax-deductible contributions that can be significantly higher than those permitted in traditional IRAs. The plan is designed to be straightforward to establish and maintain, offering a direct way for business owners to save for their own retirement and that of their employees. Contributions are made by the employer, not the employee, providing a streamlined approach to retirement funding.

SEP IRA Contribution Limits

For 2025, contributions for any single participant are capped at $70,000. In addition to the dollar limit, contributions cannot exceed 25% of an employee’s compensation. If an employer decides to contribute, they must do so for every eligible employee at the same percentage of compensation. For example, if the business owner contributes 10% of their own compensation, they must also contribute 10% for each eligible employee.

The total compensation that can be considered for this calculation is also capped. For 2025, this limit is $350,000. This means that even if an individual earns more, the contribution percentage can only be applied up to this maximum figure.

Defining Compensation for Contributions

The foundation of the contribution calculation is the participant’s “compensation.” The definition of this term varies depending on the business structure, and using the correct income figures is necessary for compliance.

Sole Proprietors and Partnerships

For a sole proprietor or a partner in a partnership, compensation is defined as net earnings from self-employment. This figure is calculated by taking the business’s gross revenue and subtracting all ordinary and necessary business expenses. A further reduction is required for one-half of the self-employment taxes paid, which accounts for the employer’s share of Social Security and Medicare taxes.

S-Corporation and C-Corporation Owners

Owners of S-Corporations and C-Corporations who work for their business are treated as employees. For these individuals, compensation is the W-2 wages they receive from the corporation, which includes salaries, bonuses, and any other taxable pay. Distributions or dividends paid to owners are not considered compensation for SEP IRA purposes.

How to Calculate Your Maximum Contribution

Once the correct compensation base is identified, the next step is to calculate the maximum contribution. The method differs between individuals receiving W-2 wages and those with self-employment income.

For an employee or business owner receiving W-2 wages, the calculation is direct. The employer multiplies the employee’s gross wages by the chosen contribution percentage, up to 25%. For instance, if an employee earns $80,000 in W-2 wages and the employer sets a 15% contribution rate, the contribution would be $12,000.

The calculation for a self-employed individual is more complex because the contribution is a deductible business expense, which reduces the net income it is based on. While the nominal rate is 25%, a simplified approach uses an effective rate of 20%. Consider a sole proprietor with $100,000 in net profit. First, they subtract their deductible self-employment tax (e.g., $7,065) to find the net adjusted self-employment income of $92,935. The maximum SEP contribution is then 20% of this adjusted amount, or $18,587.

Contribution Deadlines and Correcting Errors

The deadline for making SEP IRA contributions is the business’s tax filing deadline for the year, including any extensions. For most sole proprietorships, this means the deadline is April 15, or October 15 if a six-month extension is requested. This allows business owners to make contribution decisions after their final income figures are known.

Should an employer contribute more than the allowable limit, it is considered an excess contribution. These overages are subject to a 6% excise tax for each year they remain in the account. To avoid this penalty, the excess amount, plus any earnings attributable to it, must be withdrawn from the SEP IRA by the tax filing deadline. The process for correction involves the plan participant notifying the IRA custodian of the excess amount and requesting a distribution.