Quick answer
A SEP IRA (Simplified Employee Pension) is an employer-funded IRA that self-employed people can open in minutes. For 2026:
- You can contribute up to 25% of compensation, which works out to about 20% of net self-employment earnings for sole proprietors.
- The maximum is $72,000. Compensation above $360,000 doesn’t count.
- There are no catch-up contributions.
- You can open and fund a 2026 SEP until your tax filing deadline, including extensions: April 15, 2027, or October 15, 2027, if you extend.
Its biggest advantage is that late deadline. Its biggest weakness is that low earners can save more in a Solo 401(k).
How a SEP IRA works
A SEP is a plan the business sets up. Each participant has their own SEP IRA account at a bank or brokerage. All money comes from the employer, which for a freelancer is you.
- Setup: most providers use IRS Form 5305-SEP or their own prototype document. You don’t file the form with the IRS. Keep it with your records.
- Annual filing: none. There’s no Form 5500 for a SEP.
- Flexibility: you can contribute a different percentage each year, or skip a year.
- Investments: whatever the provider offers, usually stocks, ETFs and mutual funds.
- Roth SEP: SECURE 2.0 allows Roth SEP contributions, but not every provider offers them. Roth contributions are taxable in the year made.
2026 SEP IRA limits
| Item | 2026 figure |
|---|---|
| Maximum contribution per participant | Lesser of 25% of compensation or $72,000 |
| Effective rate for sole proprietors | About 20% of net SE earnings |
| Compensation cap | $360,000 |
| Minimum pay for an employee to be eligible | $800 |
| Catch-up contributions | Not allowed |
Why 25% becomes 20% for the self-employed
For sole proprietors and single-member LLCs, “compensation” is net profit minus half of self-employment tax, minus the SEP contribution itself. Because the contribution reduces its own base, a 25% plan rate becomes an effective 20%. IRS Publication 560 has the rate table and worksheet.
Worked example: how much can you contribute?
Assume 2026 net profit on Schedule C, no employees.
| Step | $40,000 profit | $80,000 profit | $120,000 profit |
|---|---|---|---|
| Self-employment tax | $5,652 | $11,304 | $16,955 |
| Half of SE tax | $2,826 | $5,652 | $8,478 |
| Net SE earnings | $37,174 | $74,348 | $111,522 |
| Max SEP contribution (20%) | $7,435 | $14,870 | $22,304 |
To reach the full $72,000, you need about $360,000 of net SE earnings, or roughly $376,500 of net profit.
At $80,000 of profit, a Solo 401(k) would allow the same $14,870 employer part plus a $24,500 employee deferral. That’s why lower and middle earners often choose a Solo 401(k). See SEP IRA vs Solo 401(k) vs SIMPLE IRA for the full comparison.
Deadlines
| Action | Deadline for 2026 |
|---|---|
| Set up the plan | Your tax return due date, including extensions |
| Make contributions | Same: April 15, 2027, or October 15, 2027, with an extension |
| Contributions for business entities | The entity’s filing deadline, including extensions |
You must actually file the extension to use the October date. The extension gives you more time to file and fund the SEP, not more time to pay tax. Interest and penalties still apply to unpaid tax after April 15. See our Freelancer Tax Deadlines Calendar.
When you deposit money in early 2027, tell the provider it’s a 2026 contribution.
If you have employees
A SEP must cover every employee who:
- is at least 21,
- worked for you in at least 3 of the last 5 years, and
- earned at least $800 in 2026.
You must contribute the same percentage of pay for each eligible employee as for yourself. If you contribute 25% of an employee’s $40,000 salary, that’s $10,000 into their SEP IRA. Employer contributions for employees are deductible business expenses. They’re immediately 100% vested.
Plans can use less strict eligibility rules, but not stricter ones.
Taxes and withdrawals
- Deduction: contributions for yourself go on Schedule 1 of Form 1040. They cut income tax, not self-employment tax.
- Growth: tax-deferred for traditional SEP money.
- Withdrawals: taxed as ordinary income. Before age 59 and a half, a 10% additional tax usually applies unless an exception fits.
- Required minimum distributions: apply to traditional SEP IRAs, as with other traditional IRAs.
A traditional SEP IRA balance counts for the pro-rata rule if you do a backdoor Roth IRA. That’s one reason some higher earners prefer a Solo 401(k).
How to open a SEP IRA
- Choose a provider. Most large brokerages offer SEP IRAs with no account fee.
- Adopt the plan. Complete Form 5305-SEP or the provider’s prototype agreement. Keep a signed copy.
- Open the SEP IRA account in your name, and one for each eligible employee.
- Calculate your contribution after the year ends, when you know your net profit.
- Deposit and label it for the correct tax year.
- Claim the deduction on Schedule 1 of your Form 1040.
Many brokerages let you open the SEP IRA online in under an hour. There are no testing requirements and no annual reports to the IRS, which is why accountants often suggest a SEP to freelancers who want minimal paperwork.
Because you calculate the contribution after year-end, a SEP works well with irregular freelance income. You can decide the amount once your books are closed and your Schedule C is done.
Frequently asked questions
Can I contribute to a SEP IRA and a traditional IRA?
Yes. Your SEP contribution doesn’t reduce the $7,500 IRA limit for 2026. Deductibility of the traditional IRA may be limited, because a SEP makes you an active plan participant.
Can I have a SEP IRA and a 401(k) at my day job?
Yes. The SEP is based on your self-employment income only, and it has its own $72,000 limit.
What if my business had a loss?
With no net self-employment earnings, you can’t make a SEP contribution for that year.
Is there a minimum contribution?
No. You can contribute any amount up to the limit, or nothing, each year. If you have employees, the percentage you choose must be the same for everyone who is eligible.
This article is general information, not tax or investment advice. Consult a CPA or Enrolled Agent for your situation.
Related guides
- Best Solo 401(k) Providers for Freelancers
- Health Insurance for Self-Employed: Your Options in 2026
- ACA Marketplace for Freelancers: How Subsidies Work
- HSA for Self-Employed: Triple Tax Advantage Explained
About this guide
Written by the Freelancer Tax HQ editorial team, based on our professional experience, official US government sources (IRS, SSA and other agencies) and reputable informational articles listed in the sources below. Last reviewed on . Tax rules change often, and we update this guide when they do. Read our editorial policy or report an error.
Sources
IRS Publication 560; IRS Notice 2025-67; IRS: 401(k) and IRA limits for 2026; SSA: Contribution and benefit base. Example figures are FreelancerTaxHQ illustrations.
Official resources linked in this guide: IRS: Tax preparer credentials.