The SEP-IRA in 2026 — Part 4 of Our Retirement Plan Series
Parts 1 through 3 of this series covered the 401(k) — employee deferrals, employer matching, and safe harbor design. The Simplified Employee Pension, or SEP-IRA, takes a completely different approach: no employee deferrals at all, minimal paperwork, and a contribution formula built entirely around the employer's decision each year. For a business owner who wants meaningful contribution capacity without 401(k)-level administration, here is exactly how the SEP-IRA works under IRS rules.
A Fundamentally Different Structure
A SEP-IRA is funded entirely by employer contributions, with no employee elective deferral component whatsoever, unlike the 401(k) structure covered earlier in this series. Employer contributions are made directly into a traditional IRA established for each eligible participant, and the plan itself can generally be adopted using the IRS's model Form 5305-SEP, without the more involved plan document, employer contribution schedule, and annual filing requirements a 401(k) carries. This simplicity is the SEP-IRA's defining feature: for a business with few or no employees, it can be established and funded with minimal ongoing administrative burden.
The Contribution Formula
For 2026, a SEP-IRA contribution is limited to the lesser of 25% of compensation or $72,000. For a self-employed individual, net compensation is generally calculated as net Schedule C profit reduced by the deductible portion of self-employment tax, and this net compensation figure is what the contribution formula actually applies to, which functionally reduces the effective contribution rate to approximately 20% of net self-employment income rather than a straight 25%. Maximum compensation considered for this calculation is capped at $360,000 for 2026, the same annual compensation limit that applies across other qualified retirement plans.
The Rule That Surprises Owners With Employees
This is the detail that changes the calculation for any business with staff: whatever percentage of compensation the owner contributes for themselves must be contributed at the identical uniform percentage for every eligible employee. An eligible employee generally becomes an eligible employee after working for the business in at least three of the last five years and earning a minimum compensation threshold, indexed annually. There is no ability to favor the owner with a higher percentage the way certain 401(k) profit-sharing formulas allow — a SEP-IRA's simplicity comes paired with this uniform percentage constraint, which can make it considerably more expensive than expected once a business has several employees.
Considering a SEP-IRA for your business, with employees already on staff?
The uniform contribution rule may change the real cost significantly. Schedule a consultation.
taxwealthconsultant.com | (949) 409-8335
The Flexibility and the Late Deadline
Unlike a 401(k), which generally requires the employee deferral election to be made during the plan year itself, a SEP-IRA can be established and funded as late as the business's tax filing deadline, including any extensions — often well into the following calendar year. There is also no requirement to contribute the same percentage every year; a business owner can contribute the maximum in a strong year and reduce or skip a contribution entirely in a weaker one, without the fixed employer contribution commitments that come with a defined benefit or cash balance plan design.
Where This Fits in the Series
The SEP-IRA fits best for a self-employed individual or small business owner with no employees, or very few, who wants meaningful contribution capacity without the ongoing plan administration a 401(k) requires. For an owner with employees whose ages and compensation vary significantly, the uniform-percentage rule can make a profit-sharing 401(k) design, covered in Part 5 of this series, a better fit despite the additional administration involved.
How Tax Wealth Consultant Approaches SEP-IRA Planning
Tax Wealth Consultant models the true after-employee cost of a SEP-IRA before it is adopted, calculates the correct self-employed contribution for sole proprietors using accurate net compensation, and compares the structure honestly against a 401(k) profit-sharing or Solo 401(k) design when employees are part of the picture. Simplicity is valuable, but only when the uniform contribution requirement does not quietly make the plan more expensive than a better-designed alternative.
Simple to set up. The real cost depends entirely on who else is on payroll.
Schedule your confidential 30-minute review with Tax Wealth Consultant today.
taxwealthconsultant.com | (949) 409-8335
Tax Wealth Consultant provides tax planning, tax preparation, and wealth advisory services for business owners, professionals, and investors in Irvine, Orange County, and beyond.
Comments