SEP IRA Calculator 2026
$72,000 cap, 20% effective rate for sole props, 25% of W-2 for S-corps
Last updated: November 2025 · Sources: IRS Notice 2025-67, Pub. 560
Business Information
Schedule C net profit (gross revenue minus business expenses).
SEPs have NO age-based catch-up under SECURE 2.0, the $72,000 cap is the same at all ages.
IRS Pub. 560 Calculation (Sole Prop / LLC)
Estimated Federal Tax Savings
SE tax is NOT reduced by SEP contributions because the half-SE deduction is computed before the SEP. State tax savings vary by state.
Understanding the 2026 SEP-IRA
2026 Contribution Limits
The 2026 SEP-IRA contribution cap is $72,000, which tracks the IRC §415(c) defined contribution limit. Unlike 401(k)s, SEPs do NOT have age-based catch-up contributions, the cap is the same at age 30 and age 70. The contribution is employer-side only (no employee elective deferral component), capped at 25% of compensation (nominal) which becomes 20% effective for sole proprietors after the IRS reduced-rate adjustment.
The IRS Reduced-Rate Formula (Sole Prop / LLC)
For self-employed individuals, you cannot simply take 25% of Schedule C profit. Pub. 560 requires: (1) reduce net SE by 7.65% (the §1402(a)(12) factor), (2) subtract half of SE tax (the §164(f) deduction), then (3) multiply by the "reduced rate" of 0.25 / 1.25 = 20%. The reduced rate accounts for the circular nature of the contribution itself being part of compensation. A worked example: $100,000 net SE, ×0.9235 = $92,350; half SE tax of $7,065 = $85,285 adjusted compensation; × 20% = $17,057 SEP contribution.
S-Corp Owner-Employee Path
If you elect S-corp status (Form 2553), your "reasonable compensation" W-2 wages are the SEP base, and the corporation contributes a clean 25% of those W-2 wages (no reduced-rate adjustment needed because the W-2 wage already excludes the employer SEP contribution). Example: $80,000 W-2 wages × 25% = $20,000 SEP. The S-corp deducts this on Form 1120-S Line 17. The catch: if you split income aggressively into low W-2 + high distributions to save SE tax, you also limit your SEP contribution.
Pro-Rata Coverage Rule
SEPs follow strict pro-rata coverage (IRC §408(k)(2)). Every eligible employee (age 21+, worked 3 of the last 5 years, earned more than $800 in 2026) must receive the SAME contribution percentage as the owner. If you contribute 20% for yourself, you must contribute 20% for each eligible employee. This makes SEPs prohibitively expensive once you hire even a few staff, most owners with W-2 employees pivot to a Safe Harbor 401(k) or SIMPLE IRA instead.
Contribution Deadlines
SEPs have the most flexible deadlines of any retirement plan. You can fund a 2026 SEP contribution up to the extended tax-filing deadline of October 15, 2027. SECURE Act §201 also allows you to ESTABLISH the SEP plan after year-end (up to the extended deadline). This is a huge advantage over Solo 401(k)s, where the employee deferral portion requires a year-end election. Many freelancers wait until tax time to compute their actual income, then fund the SEP for the maximum benefit.
SEP vs Solo 401(k)
For an owner-only business (no employees), the Solo 401(k) usually wins on maximum contribution. Why? The Solo lets you stack an employee elective deferral of $24,500 on top of the 20% employer profit-share. Example at $100,000 net SE: SEP = $17,057, Solo 401(k) = $24,500 + $17,057 = $41,557. Both share the $72,000 §415(c) cap, but the Solo reaches the cap at much lower income (~$237,000 net SE vs ~$360,000 for a pure SEP). When SEP wins: simpler paperwork (one-page Form 5305-SEP), no Form 5500-EZ filing requirement, and the October-extended deadline (vs Dec 31 Solo 401(k) deferral deadline).
SECURE 2.0 Roth SEP Option
SECURE 2.0 §601 (effective 2023) added a Roth SEP option. Roth SEP contributions are not deductible but grow tax-free and qualified withdrawals after 59½ are tax-free. As of 2026, most major IRA custodians (Fidelity, Schwab, Vanguard) support Roth SEPs. Roth SEP contributions are reported as taxable income (Box 1 of W-2 for S-corp, or as ordinary income for sole prop). Choose Roth if you expect to be in the same or higher bracket in retirement.
Frequently Asked Questions
SEP IRA vs Solo 401(k), which is better?
For a sole-only owner, the Solo 401(k) usually wins because it stacks a $24,500 employee deferral on top of the 20% employer profit-share. Both share the same $72,000 cap, but the Solo gets you to the cap at a much lower income.
Do I have to fund SEPs for my employees?
Yes. SEPs require pro-rata coverage (IRC §408(k)). Every eligible employee (age 21+, worked 3 of last 5 years, earned more than $800) must receive the same percentage of pay the owner gives themselves.
What is the SEP contribution deadline for 2026?
Up to your extended tax filing deadline, October 15, 2027 if you file Form 4868. SECURE Act §201 also allows you to ESTABLISH the SEP plan retroactively up to that same date.
Can a SEP-IRA accept Roth contributions?
Yes under SECURE 2.0 §601, if your custodian supports Roth SEPs. Most major custodians (Fidelity, Schwab, Vanguard) rolled out Roth SEP buckets in 2024-2025. Roth contributions are not deductible but grow tax-free.
When does a SEP beat a Solo 401(k)?
When you value simplicity: no Form 5500-EZ filing required at $250k balance, one-page Form 5305-SEP setup, and an October-extended deadline. If you only want to contribute around 20% of income, the SEP wins.
How do I deduct SEP contributions?
Sole prop / LLC: deduct on Schedule 1 Line 16 (Adjustments to Income), NOT on Schedule C. S-corp: the corporation deducts SEP contributions on Form 1120-S Line 17, which reduces the K-1 income flowing to the owner.