A SEP IRA (Simplified Employee Pension) is the simplest retirement plan a self-employed person can open. You set it up with a bank or brokerage, contribute a percentage of your business earnings, and deduct it. For 2026, the most you can contribute is the lesser of $72,000 or, for a self-employed person, about 20% of net profit after the deductible half of self-employment tax. A plan set up on the IRS model form usually doesn’t need an annual information return, you don’t have to contribute every year, and you can open and fund it as late as your tax filing deadline, including extensions.
How a SEP works
Under a SEP, the business (you, if you’re a sole proprietor) contributes to a SEP IRA, a traditional IRA or, now, a Roth IRA that holds the contributions, per Publication 560. Setting one up takes three steps:
- Sign a formal written agreement. Most people use the IRS model Form 5305-SEP, which you keep and don’t file with the IRS.
- Give the plan information to any eligible employees.
- Open a SEP IRA for yourself and for each eligible employee.
If you have employees, you must contribute for each eligible one at the same rate you use for yourself. For 2026, an eligible employee is one who’s at least 21, has worked for you in 3 of the last 5 years, and earned at least $800 from you (Notice 2025-67; Publication 560). For a solo freelancer with no employees, that’s a non-issue.
2026 limits
| Item | 2026 |
|---|---|
| Maximum contribution (dollar cap) | $72,000 |
| Percentage limit | 25% of compensation; for you as a self-employed person, 20% of net profit minus half of SE tax |
| Maximum compensation considered | $360,000 |
| Catch-up contributions (50+) | None, since SEP contributions are employer contributions |
| Employee eligibility pay threshold | $800 |
| Deadline to set up and to contribute | Your return's due date, including extensions |
Maximum contribution (dollar cap)
- 2026
- $72,000
Percentage limit
- 2026
- 25% of compensation; for you as a self-employed person, 20% of net profit minus half of SE tax
Maximum compensation considered
- 2026
- $360,000
Catch-up contributions (50+)
- 2026
- None, since SEP contributions are employer contributions
Employee eligibility pay threshold
- 2026
- $800
Deadline to set up and to contribute
- 2026
- Your return's due date, including extensions
Dollar figures from Notice 2025-67. Rules from Publication 560 (2025) and the IRS page on calculating your own retirement plan contribution.
Why it’s 20%, not 25%, for you
The SEP limit is 25% of compensation. But as a self-employed person, your compensation is your net earnings after deducting both half of your self-employment tax and the contribution itself. That circularity makes 25% of the reduced figure work out to 20% of your net profit minus half of SE tax: 25% ÷ (1 + 25%). The IRS spells out this “reduced rate” method on its page on calculating your own contribution. Publication 560 describes the cap for your own account as 20% of your net earnings from self-employment.
Worked example: $100,000 of net profit
A single freelancer with $100,000 of Schedule C net profit and no employees wants the maximum 2026 SEP contribution.
- 1$100,000
Net profit (Schedule C)
- 2$14,129
Self-employment tax
$100,000 × 92.35% = $92,350; × 15.3%
- 3−$7,065
Deductible half of SE tax
- 4$92,935
Adjusted net earnings
$100,000 − $7,065
- 520%
Reduced contribution rate
25% ÷ 1.25
- 6$18,587
Maximum SEP contribution
$92,935 × 20% (well under the $72,000 cap)
- 7$8,235
Federal income tax without the SEP
Taxable income $61,468
- 8$5,344
Federal income tax with the SEP
Taxable income $46,598
- 9$2,891
Federal income tax saved in 2026
Self-employment tax stays $14,129
Illustrative. Single filer, 2026 standard deduction ($16,100) and tax rate schedule, 20% QBI deduction (which the SEP contribution also reduces), no other income. Rounded to the dollar. Our Self-Employed Retirement Contribution Calculator runs the same contribution math for any profit level.
Some of that saving comes from the 22% bracket. Without the SEP, $11,068 of this freelancer’s taxable income sits above the $50,400 line where 22% starts. The contribution pulls all of it back into the 12% bracket. Run your own numbers with our Self-Employed Retirement Contribution Calculator.
What it doesn’t reduce
The SEP deduction goes on Schedule 1 (Form 1040), line 16, “self-employed SEP, SIMPLE, and qualified plans,” as referenced in Publication 590-A and Form 7206. It’s not a Schedule C expense, so, like the HSA deduction, it lowers income tax but not self-employment tax. That’s still figured on your full Schedule C profit. The contribution also reduces your qualified business income, per the Form 8995 instructions, which is why the QBI deduction drops in the example.
Deadlines and flexibility
- Set it up late. You can establish a SEP for 2026 as late as the due date of your 2026 return, including extensions, per Publication 560.
- Fund it late. To deduct 2026 contributions, make them by that same due date, including extensions.
- Skip years. You don’t have to contribute every year. That makes a SEP a natural fit for irregular income.
- Keep your IRA. SEP contributions don’t affect how much you can put into a Roth or traditional IRA, per Publication 560. The IRS SEP FAQ notes, though, that your participation can reduce or eliminate the deduction for a traditional IRA contribution. A Roth IRA is unaffected, apart from its own income limits.
When a SEP isn’t the best choice
A SEP’s contribution is purely a percentage of your earnings. A Solo 401(k) adds an employee deferral of up to $24,500 in 2026 on top, plus catch-up contributions from age 50. So at most income levels below the cap, a Solo 401(k) lets you put away more. It also comes with a bit more paperwork. We compare them side by side in Solo 401(k) vs. SEP IRA. If you also have a job with a 401(k), see Can I Contribute to a SEP IRA and a 401(k) at the Same Time?
Bottom line
A SEP IRA lets a self-employed person contribute up to 20% of net profit minus half of SE tax, capped at $72,000 for 2026. You can open and fund it as late as your extended filing deadline, and you don’t have to contribute in lean years. At $100,000 of profit, that’s $18,587 a year and $2,891 less federal income tax in our example. If you want to save more than 20% of your profit, look at a Solo 401(k).