A Simplified Employee Pension Individual Retirement Arrangement, usually shortened to a SEP IRA, is a retirement plan that an employer sets up for employees, including a self-employed business owner. It is designed to be simple to run: the employer makes contributions, there is no employee salary deferral as there is in a 401(k), and the amount contributed can change from year to year. For 2025, the headline figure that most readers search for is the maximum contribution, and it is a limit with two parts, not one. This guide explains that limit, who is eligible, how the calculation differs for employees and for self-employed owners, and when contributions must be made.
This article is general educational information only, not personal financial or tax advice. Retirement plan rules have detailed conditions, and the figures below are the Internal Revenue Service (IRS) limits for the 2025 tax year, as set out in IRS Publication 560, Retirement Plans for Small Business (IRS, 2025). Check the current IRS guidance and your plan document before you rely on any figure for your own return.
What Is a SEP IRA and Who Can Use One?
A SEP IRA is an employer plan. A business owner, including a sole proprietor, a partnership, or a corporation, adopts a written SEP plan, and the employer then makes contributions to a separate IRA for each eligible employee. The contributions are made by the employer only. Employees do not contribute from their own pay to a SEP IRA, although they may also have their own separate traditional or Roth IRA subject to the usual IRA rules. Each eligible employee’s SEP IRA is their own account, and contributions are immediately fully vested, which means the employee owns them in full from the day they are made.
The appeal of a SEP IRA is flexibility combined with a high contribution ceiling. An employer can contribute anywhere from 0% up to the maximum percentage in a given year, depending on what the business can afford, and the employer is not locked into the same rate every year. That flexibility suits businesses whose income varies, because a generous year can fund a larger contribution and a lean year can fund a smaller one or none at all, provided the plan’s terms are followed. The trade-off is that the contribution rule must be applied fairly: the same percentage of compensation must be contributed for all eligible employees, including the owner, so an owner cannot fund a large contribution for themselves while funding nothing for eligible staff.
A SEP IRA is not the only retirement option for a small business, and it is not always the best one. A SIMPLE IRA and a 401(k), including a solo 401(k) for a business with no employees other than a spouse, allow employee deferrals as well as employer contributions, which can change the total that can be saved at a given income level. Our guide to the main types of retirement accounts compares the broad options, and the rest of this guide focuses on the SEP IRA limit itself.
What Is the Maximum SEP IRA Contribution for 2025?
For 2025, the maximum SEP IRA contribution for any one person is the smaller of two figures: 25% of that person’s compensation, or $70,000 (IRS, 2025). Only the first $350,000 of compensation can be counted for this purpose in 2025. That compensation cap matters at higher incomes, because 25% of $350,000 is $87,500, which is above the $70,000 dollar limit, so the dollar limit is what binds once compensation reaches $280,000 at a 25% contribution rate, since 25% of $280,000 is exactly $70,000.
The 2025 dollar limit of $70,000 is $1,000 higher than the 2024 limit of $69,000, reflecting the usual annual cost-of-living adjustment. It is a per-person limit for SEP contributions, not a combined household limit, and it applies separately to each eligible employee. It is also distinct from the separate $7,000 limit for 2025 for an individual’s own traditional or Roth IRA contributions, with an additional catch-up amount for those aged 50 and over. SEP contributions do not have a catch-up addition for older participants in the same way, because the SEP limit is already an employer limit based on compensation, not an employee deferral limit.
Two common misunderstandings are worth clearing up. First, the 25% figure is a maximum, not a required rate. An employer may choose a lower rate, for example 10% or 15%, and must then apply that same rate to all eligible employees. Second, the dollar limit is a ceiling, not a target. Contributing the maximum is not automatically sensible for every business, because the contribution is a real cash cost in the year it is made, and because it must be matched, at the same percentage, for eligible employees.
How Is the Contribution Worked Out for Employees?
For a common-law employee, the calculation is straightforward. Take the employee’s eligible compensation for the year, up to the $350,000 cap, multiply it by the plan’s contribution rate for that year, and then apply the $70,000 ceiling. A clearly labelled hypothetical example makes this concrete. Suppose an employee earns $80,000 in 2025 and the employer chooses a 25% contribution rate. Twenty-five per cent of $80,000 is $20,000, which is below the $70,000 ceiling, so the contribution for that employee is $20,000.
Now suppose another employee earns $300,000 in 2025 and the same 25% rate applies. Twenty-five per cent of $300,000 is $75,000, which is above the $70,000 ceiling, so the contribution is capped at $70,000. The cap, not the percentage, decides the answer at that income level. If the employer had chosen a 10% rate instead, the first employee would receive $8,000 and the second would receive $30,000, and both figures would be below the ceiling.
Eligibility is the other half of the employee calculation. Under the most restrictive rules the IRS allows a plan to use, an employee must be covered if they are at least 21 years old, have worked for the employer in at least three of the last five years, and received at least $750 in compensation from the employer in 2025 (IRS, 2025). An employer may choose less restrictive rules, for example covering employees sooner, but any rule chosen must be applied consistently to all employees. Seasonal and part-time work counts towards the three-of-five-years test if the employee did any work for the employer in that year, however brief, which surprises some small employers who assume only full-time years count.
How Is the Contribution Worked Out If You Are Self-Employed?
If you are self-employed, the same two-part limit applies, but the calculation is different, because you do not have W-2 wages from yourself. Your compensation for SEP purposes is your net earnings from self-employment, adjusted in two ways that the IRS worksheet in Publication 560 works through step by step. First, you subtract the deductible half of your self-employment tax. Second, you subtract the SEP contribution itself, which is why the effective rate for a self-employed owner is lower than the headline plan rate. At a 25% plan rate, the reduced rate applied to the adjusted figure is 20%, and applying 20% after the self-employment tax adjustment gives the maximum deductible contribution.
A clearly labelled hypothetical example, using the IRS worksheet logic, shows why you cannot simply multiply your business profit by 25%. Suppose your net profit from self-employment is $100,000. Self-employment tax is calculated on 92.35% of that figure, at the combined rate of 15.3%, giving tax of $14,129.55, half of which, $7,064.78, is deductible. Subtracting that half from $100,000 leaves $92,935.22. Applying the reduced 20% rate to that figure gives a maximum SEP contribution of about $18,587, not $25,000. The difference is the whole point of the special calculation, and using the headline 25% on unadjusted profit would overstate the contribution and the deduction.
The practical lesson is to use the IRS worksheet, or a calculator that follows it, rather than a shortcut percentage, and to keep the calculation with your tax records for the year. Your contribution is also limited by the same $70,000 ceiling, and by the requirement that the same percentage rate, before the self-employed adjustment, applies to eligible employees. If you have employees, their contributions are worked out on their wages, while yours is worked out on the adjusted self-employment figure, but the plan rate that underlies both is the same.
When Must Contributions Be Made, and Can the Rate Change Each Year?
SEP IRA contributions for a given tax year must be made by the employer’s tax filing deadline for that year, including extensions. That timing is one of the plan’s most useful features: an employer does not have to decide the final contribution before the year ends, and can wait until the tax return is being prepared, when the year’s profit and the employees’ compensation are known, before funding the contribution. The plan itself must be set up by that same deadline for the first year, so a business can still establish a SEP IRA for 2025 while preparing its 2025 return, provided the deadline, including any extension, has not passed.
The rate can change each year. An employer may contribute 25% in one year, 10% in the next, and nothing in a third year, without amending the plan, as long as the rate chosen in each year is applied uniformly to all eligible employees. That discretion is valuable, but it also means employees cannot rely on a SEP contribution in any particular year in the way they can rely on a salary deferral they control themselves. If a business wants a more predictable employee benefit, a different plan type may suit it better, even if the SEP IRA ceiling is higher.
Contributions are generally deductible by the employer as a business expense, subject to the plan and tax rules for the year, and they grow tax-deferred inside the IRA. Withdrawals in retirement are generally taxed as ordinary income, and withdrawals before age 59 and a half may also attract an additional 10% tax, subject to the usual exceptions. Required minimum distributions generally begin at age 73 under current law, with later ages for those reaching 73 after 2032. These tax points are general information only: the treatment of any particular contribution or withdrawal depends on the individual’s tax situation, so a tax professional’s advice is worth taking before a large contribution is made.
How Does a SEP IRA Compare With a Traditional or Roth IRA?
The main difference is scale. An individual’s own traditional or Roth IRA contribution for 2025 is limited to $7,000, or $8,000 if aged 50 or over, subject to income limits for deductibility and for Roth eligibility. A SEP IRA contribution can be up to $70,000 for 2025, because it is an employer contribution based on compensation, not an employee deferral. That scale is why SEP IRAs are popular with self-employed people and small business owners who have no other employer plan and who want to save substantially more than the individual IRA limit allows.
The second difference is control. With a traditional or Roth IRA, the individual decides whether and how much to contribute, up to the limit. With a SEP IRA, the employer decides the rate each year, and employees cannot add their own salary deferrals to the SEP IRA itself. An employee who wants to save more can still contribute to their own separate IRA, subject to its own limit and to the interaction between the two, but they cannot top up the SEP IRA from their pay.
The third difference is administration. A SEP IRA has no annual IRS filing for the plan itself in the way a 401(k) does, and the employer simply adopts a written plan, often using the IRS model Form 5305-SEP, and opens an IRA for each eligible employee. That simplicity, combined with the high ceiling and the flexible annual rate, is the reason the plan remains popular despite its lack of an employee deferral feature. For a business with several employees, however, the requirement to fund the same percentage for everyone can make a SEP IRA expensive at a high rate, and in that case a 401(k) with a different contribution structure may be more cost-effective overall. For a broader comparison of account types, see our guide to retirement accounts explained, and for how withdrawals are planned in retirement, see our guide to how long your money might last in retirement.
Frequently Asked Questions
What is the maximum SEP IRA contribution for 2025?
For 2025, the maximum is the smaller of 25% of compensation or $70,000, counting only the first $350,000 of compensation (IRS, 2025). At a 25% rate, the dollar ceiling binds once compensation reaches $280,000.
Can an employee contribute to a SEP IRA from their own pay?
No. SEP IRA contributions are made by the employer only. Employees cannot make salary deferrals into a SEP IRA, although they may contribute separately to their own traditional or Roth IRA subject to the usual limits.
Do I have to contribute the same percentage for all employees?
Yes. The contribution percentage chosen for a year must be the same for all eligible employees, including the owner. That uniformity rule is what prevents a plan from favouring the owner over staff.
What is the deadline for 2025 SEP IRA contributions?
Contributions for 2025 must be made by the employer’s tax filing deadline for 2025, including extensions. The plan itself must also be established by that deadline for its first year.
Can I have a SEP IRA and another retirement plan?
Generally yes, subject to the rules that apply to each plan and to combined limits where they apply. A business may maintain a SEP IRA alongside another plan, but the interaction of the limits is detailed, so check the current IRS guidance or take professional advice before combining plans.
The Bottom Line
The maximum SEP IRA contribution for 2025 is the smaller of 25% of compensation or $70,000, with only the first $350,000 of compensation counted. For employees, that is a direct percentage of wages, capped at $70,000. For a self-employed owner, the same limit runs through the IRS worksheet, which adjusts for self-employment tax and reduces the effective rate, so a $100,000 profit at a 25% plan rate supports a contribution of about $18,587, not $25,000. The rate can vary from year to year, including down to zero, but it must be the same percentage for all eligible employees, and contributions for 2025 must be made by the tax filing deadline including extensions. Used with those rules understood, a SEP IRA offers a high, flexible, and simply administered way for a small business to fund retirement, provided the cost of funding the same percentage for staff is factored in from the start.
This article is general educational information only, not personal financial or tax advice. SEP IRA limits and eligibility rules are set by the IRS and change annually, so confirm the figures that apply to your tax year before contributing.