SEP IRA contribution limits for 2026: the $72,000 cap, explained

The 2026 SEP limits at a glance

The IRS states the rule in one line on its SEP contribution limits page: contributions an employer makes to an employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $72,000 for 2026. The dollar figure is the §415(c) defined-contribution limit, which Notice 2025-67 raised from $70,000. The same notice sets the other two numbers that matter:

• Compensation cap: $360,000 (up from $350,000). Pay above this is ignored when computing anyone's contribution, under §§401(a)(17) and 408(k)(3)(C).
• Minimum-compensation threshold: $800 (up from $750). This is the §408(k)(2)(C) figure that decides whether a low-paid employee must be included. Secondary sources disagree on this number, and the IRS's own SEP FAQ page still shows older figures; Notice 2025-67 is the primary source, and it says $800 for 2026.

Two things the headline number hides. First, the $72,000 is a combined limit across all defined-contribution plans of the same employer, so a SEP and a 401(k) for the same business share it. Second, the 25% almost always binds before the dollar cap: an employee needs $288,000 of pay before 25% reaches $72,000.

How the 25% works for W-2 employees

For a common-law employee, or an S corporation owner paid through payroll, the calculation is straightforward. Compensation means W-2 pay — wages, bonuses, commissions — and the contribution is a flat percentage of it. An employee earning $120,000 at a 25% contribution rate receives $30,000. An employee earning $400,000 receives $72,000, because only $360,000 of pay counts and 25% of that ($90,000) is above the dollar cap.

For S corporation owners, note what is not compensation: shareholder distributions. Only W-2 wages count. An owner who takes a modest salary and large distributions will find the SEP contribution correspondingly modest, which is one of the trade-offs inside the reasonable-compensation decision.

The self-employed calculation: why 25% becomes 20%

This is where most online calculators go wrong. A sole proprietor or partner has no W-2. Their "compensation" for SEP purposes is net earnings from self-employment, reduced by the deductible half of self-employment tax and by the SEP contribution itself. The IRS SEP FAQs put it as net profit, minus one-half of SE tax, minus your SEP contribution.

Because the contribution shrinks the base it is calculated on, the math is circular. Publication 560 resolves it with a reduced rate: divide the plan rate by one plus the plan rate. For a 25% plan, 0.25 ÷ 1.25 = 20%, applied to net earnings after the half-SE-tax deduction. Here is the full calculation on $150,000 of 2026 Schedule C profit, using the 2026 Social Security wage base of $184,500:

Measured against Schedule C profit, the effective rate here is about 18.6%. Contributing the naive $37,500 would create an excess contribution: it is not deductible, and if it is not withdrawn with earnings by the extended due date of the return, it is subject to a 6% excise tax each year it stays in the account.

Where does a sole proprietor hit the $72,000 cap? You need $360,000 of net earnings after the half-SE-tax deduction (20% × $360,000 = $72,000). With the Social Security portion of SE tax topping out at the wage base, that takes roughly $376,000 of Schedule C profit in 2026. Treat that as an estimate; the exact crossover depends on any W-2 wages you also earned, which use up part of the wage base. Partners follow the same method using self-employment earnings from their K-1.

No deferrals, no catch-up

A SEP is funded entirely by the employer. There is no salary-deferral feature, and the IRS is explicit that elective deferrals and catch-up contributions are not permitted in SEP plans. Turning 50, or reaching the 60-to-63 window that gives 401(k) participants an $11,250 catch-up in 2026, changes nothing about your SEP limit.

The one exception is a narrow one. Grandfathered SARSEPs — salary-reduction SEPs established before 1997 — still allow deferrals of up to $24,500 for 2026 plus catch-up. No new SARSEP can be opened, so if yours is not one already, this does not apply.

A SEP-IRA is a traditional IRA, though, and if the custodian allows it you can make a regular IRA contribution into the same account, including the $1,100 IRA catch-up at 50 or older. That is your personal IRA limit, not an increase to the SEP.

Who must be covered, and the uniform-percentage rule

A SEP is cheap to run because it gives you almost no discretion over who participates. The plan must cover every employee who meets these maximum requirements (your plan document can be more generous, never stricter):

• Age 21 or older;
• worked for the business in at least 3 of the last 5 years — any amount of work in a year counts as a year;
• received at least $800 of compensation for 2026, per Notice 2025-67.

Union employees covered by a bargained retirement benefit and nonresident aliens with no U.S.-source pay can be excluded. Everyone else who qualifies must receive a contribution in any year you make one — including people who left before year-end. There is no last-day-of-year requirement.

And under most SEP documents, including the IRS model Form 5305-SEP, contributions must be the same percentage of compensation for everyone, owner included. The uniform rate is the plan rate, not your effective one. If your plan rate is 25%, your own contribution works out to 20% of net earnings, but an eligible employee earning $60,000 receives the full 25% of W-2 pay: $15,000. That asymmetry surprises owners: employees receive the full stated rate, you receive the reduced one. For a business with staff, this is usually the deciding factor against a SEP.

The flexibility runs the other way, too. You are not required to contribute every year. You can contribute 25% in a strong year and nothing in a weak one, as long as everyone eligible is treated the same.

Deadlines for 2026 contributions

The IRS confirms that you deposit SEP contributions for a year by the due date of your federal income tax return for that year, including extensions — and if you obtained an extension, you have until the end of it regardless of when you actually file. You can also establish the SEP as late as that same extended due date, which makes it the only plan you can open in, say, September 2027 and still fund for 2026.

One trap: if you did not request an extension and miss the original due date, the contribution cannot be deducted on that year's return. It can be deducted the following year instead. Your custodian will report the deposit on Form 5498 for the year it actually arrives, not the year it is for — that mismatch is normal.

Roth SEP contributions under SECURE 2.0

Until 2023, every SEP dollar was pre-tax. SECURE 2.0 section 601 changed that for tax years beginning after December 31, 2022: an employer may let employees elect to have SEP contributions made as Roth contributions. The IRS set out the mechanics in Notice 2024-2 (questions K-1 through K-8):

• It is optional for the employer. No business is required to offer the Roth election.
• The election must be made before the contribution is made, and it must be an affirmative choice by the employee.
• The contribution is taxable to the employee in the year it is made to the Roth IRA, and is reported on Form 1099-R rather than as wages.
• The dollar limits do not change. A Roth SEP contribution counts against the same 25% / $72,000 ceiling.

The practical constraint is supply. The plan document must permit the election, and the custodian must be willing to accept employer contributions into a Roth account. Rollout has been slow and uneven; as of this writing not every major custodian offers it, and an older Form 5305-SEP or prototype document may not provide for it. Ask before you assume. For a self-employed owner, how the Roth designation interacts with the 20% calculation and the deduction is something to confirm with your preparer — we have not seen detailed IRS worked examples for that case.

Whether you want Roth treatment at all is the familiar question of today's rate versus your expected rate later; the pre-tax vs Roth guide works through it.

A SEP plus your own IRA, and the backdoor Roth problem

SEP contributions do not reduce your personal IRA limit. You can receive a full SEP contribution and still contribute $7,500 to a traditional or Roth IRA for 2026 ($8,600 at 50 or older), subject to the usual income rules. Two interactions matter:

• Deductibility. SEP participation makes you an "active participant" in a workplace plan, so a traditional IRA deduction phases out between $81,000 and $91,000 of modified AGI for single filers in 2026 ($129,000–$149,000 for joint filers).
• The pro-rata rule. A SEP-IRA is a traditional IRA. Its balance is aggregated with your other traditional, SEP and SIMPLE IRA balances on Form 8606 when you convert. If you hold $200,000 in a SEP-IRA and attempt a backdoor Roth, most of the conversion will be taxable.

That second point is the hidden cost of a SEP for high earners who rely on the backdoor Roth IRA. The usual fix is to move the pre-tax money into a 401(k) before December 31 of the conversion year, which in turn requires having a 401(k) — another reason many owners eventually switch plans.

A SEP-IRA can also be held at a custodian that permits alternative assets; the self-directed IRA guide covers what that allows and what it forbids. Alternative assets carry their own risks, including illiquidity and the possibility of losing principal, and none of the contribution rules above change because of what the account holds.

SEP vs solo 401(k) vs SIMPLE IRA for 2026

We cover the solo 401(k) in depth, including the SEP question, in solo 401(k) vs self-directed IRA. The summary for 2026, from Notice 2025-67 and IR-2025-111:

The last row is the whole argument. At moderate self-employment income, the solo 401(k)'s deferral — which is not a percentage of anything — nearly doubles what a SEP allows. The $52,380 is the $24,500 deferral plus the same $27,880 employer contribution; our guide to solo 401(k) contribution limits for 2026 runs that math by age bracket, including catch-ups. The SEP's advantages are simplicity, no Form 5500-EZ filing at any balance, and the ability to set it up after year-end. Above roughly $376,000 of profit, both plans reach the same $72,000, and the solo 401(k) only pulls ahead through catch-up contributions. If you are choosing between the two, solo 401(k) vs SEP IRA compares them at three income levels and covers employees, loans, the backdoor Roth and switching plans. The SIMPLE figure is an estimate (3% match on about $139,400 of net earnings plus an $18,100 deferral); SIMPLE plans also generally must be set up by October 1 of the year.