SEP IRA Contribution Limits 2026: The Self-Employed Math
TL;DR: For 2026 the IRS caps a SEP IRA at the lesser of 25% of compensation or $72,000. If you are self-employed, that "25%" is misleading: your compensation is net earnings, so the plan rate works out to 20% of net profit after the deduction for half your self-employment tax. A sole proprietor with $100,000 of net profit can put in about $18,587, not $25,000. A Solo 401(k) usually lets the same person save more, because it adds a flat employee deferral of up to $24,500 on top.
What is the 2026 SEP IRA contribution limit?
A SEP IRA (Simplified Employee Pension) lets a business fund a retirement account for itself and any employees. The employer makes the whole contribution; the worker puts in nothing. For 2026 the IRS caps that contribution at the lesser of 25% of the employee's compensation or the Section 415(c) dollar limit, which rose to $72,000 for 2026 under Notice 2025-67 (up from $70,000 in 2025).
For someone with a W-2 employer that math is direct: 25% of salary, capped at $72,000. For the self-employed it is not, and that gap is where most of the confusion lives. When you are both the business and the only worker, the IRS does not treat your Schedule C profit as "compensation." It treats your net earnings from self-employment as compensation, and net earnings are smaller than net profit.
Why 25% becomes 20% for the self-employed
Publication 560, the IRS guide for small-business retirement plans, spells out the catch: "The deduction for contributions to your own SEP IRA and your net earnings depend on each other." The contribution reduces your net earnings, and your net earnings set the contribution, so the two are defined in a loop.
The IRS breaks the loop with a rate table. Publication 560 tells a self-employed person to "use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed" in chapter 5, and for a plan written at 25%, the reduced rate that table returns is 20%. The algebra is simple once you see it: 25% divided by 1.25 is 20%, which strips out the circularity of contributing to yourself.
There is a second reduction before the 20% even applies. Your net earnings from self-employment are your net profit minus the deduction for one-half of your self-employment tax. So the base you multiply by 20% is already smaller than the profit on line 31 of your Schedule C.
Worked example: a $100,000 sole proprietor
Take a freelancer whose 2026 Schedule C shows $100,000 of net profit and who has no employees.
- Self-employment tax. The tax applies to 92.35% of net profit, so the base is $92,350. At 15.3% that is about $14,130 in self-employment tax.
- The deductible half. Half of $14,130 is $7,065, which comes off net profit to reach net earnings from self-employment: $100,000 minus $7,065 is $92,935.
- Apply 20%. Twenty percent of $92,935 is $18,587.
That $18,587 is the maximum SEP contribution, against the $25,000 a straight "25% of $100,000" would suggest. The difference, $6,413, is not a rounding quirk. It is the combined effect of the self-employment-tax deduction and the 20% reduced rate, and it applies to every self-employed SEP.
The self-employment tax calculator does step 1 for you if you would rather not run Schedule SE by hand.
2026 SEP IRA and Solo 401(k) limits
The dollar ceilings that bound these plans all moved for 2026. Here are the figures that matter to a one-person business, from the IRS 2026 announcement of Notice 2025-67 and the agency's COLA tables.
| Limit (2026) | Amount | 2025 |
|---|---|---|
| SEP / defined-contribution cap (§415(c)) | $72,000 | $70,000 |
| Compensation cap (§401(a)(17)) | $360,000 | $350,000 |
| Solo 401(k) employee deferral | $24,500 | $23,500 |
| Deferral catch-up, age 50+ | $8,000 | $7,500 |
| Deferral catch-up, ages 60–63 | $11,250 | $11,250 |
| SEP minimum compensation to be covered | $800 | $750 |
The compensation cap and the dollar cap line up on purpose: 20% of the $360,000 compensation limit is exactly $72,000. So $72,000 is the hard ceiling on a SEP no matter how high your profit runs, and you reach it once net earnings hit $360,000.
SEP IRA vs Solo 401(k): which lets you save more?
Both plans suit a business with no employees other than a spouse, and both use the same 20% employer math. The Solo 401(k) adds a second layer the SEP does not have: a flat employee deferral of up to $24,500 that does not depend on a percentage of profit.
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Employer contribution | 20% of net earnings | 20% of net earnings |
| Employee deferral | None | Up to $24,500 |
| Catch-up (age 50+) | None | $8,000 ($11,250 at 60–63) |
| Combined 2026 cap | $72,000 | $72,000 plus catch-up |
| Setup and funding deadline | Return due date, with extensions | Employer part: return due date with extensions |
| Best when | Income is high, or you want the latest funding date | Income is modest and you want to save the most |
Return to the $100,000 freelancer. The SEP tops out at $18,587. A Solo 401(k) lets the same person defer $24,500 as the employee and add the $18,587 employer contribution, for $43,087. At lower income the gap widens: on $60,000 of net profit the SEP allows about $11,152 (20% of $55,761 net earnings), while the Solo 401(k) allows that plus the $24,500 deferral, roughly $35,652. The employee deferral is a fixed dollar amount, so it is worth proportionally more the less you earn.
The SEP wins on two fronts. It is simpler to open, and Publication 560 lets you both establish it and fund it "as late as the due date (including extensions) of your income tax return," which for a 2026 SEP can mean October 2027. A Solo 401(k) reaches its full $72,000 sooner only for high earners, where the flat deferral stops being the deciding factor.
Common mistakes to avoid
Contributing 25% of profit. The single most common error is funding a SEP at 25% of Schedule C net profit. For a sole proprietor the ceiling is 20% of net earnings, a smaller number, and over-contributing triggers a 10% excise tax on the nondeductible excess under Internal Revenue Code section 4972.
Forgetting the compensation cap. Only the first $360,000 of 2026 compensation counts. A high earner cannot push a SEP past $72,000 by applying 20% to a larger figure.
Expecting a catch-up in a SEP. The age-50 catch-up belongs to 401(k) and IRA plans, not SEPs. If you are 50 or older and want the extra $8,000 (or $11,250 at ages 60 to 63), that is a reason to run a Solo 401(k) instead.
Treating employees as optional. A SEP must contribute the same percentage for every eligible employee as the owner takes. If your business grows past you, the plan that was cheap as a solo vehicle becomes an equal-percentage obligation for the staff, and Publication 560's coverage rules decide who counts.
How SparkReceipt fits
Every figure above starts from one line: your net profit. That number is only as accurate as the expenses behind it, and a deduction you did not record inflates your profit, your self-employment tax, and, downstream, the contribution you think you can make. SparkReceipt captures receipts and categorizes them into tax-ready buckets, and its income and P&L reporting gives you the net-profit figure the 20% rate runs on, without a December reconstruction. Keeping the books current through the year also keeps your QBI deduction planning honest, since retirement contributions and taxable income move together. See pricing to start.
SEP IRA contribution FAQ
Can I have both a SEP IRA and a Solo 401(k)? You can, but for a one-person business it rarely helps. Both draw on the same 20% employer math and the same $72,000 Section 415(c) limit across plans, so a second plan does not raise the ceiling. Most self-employed people pick one.
Does the SEP contribution reduce my self-employment tax? No. The SEP deduction lowers your income tax and your adjusted gross income, but self-employment tax is figured on net earnings before the retirement deduction, so it stays the same.
What is the deadline to open a 2026 SEP? You can set up and fund a 2026 SEP as late as the due date of your 2026 return including extensions, so with an extension that runs into October 2027. This is the SEP's main scheduling advantage over a Solo 401(k) employee deferral.
Is the 2026 SEP limit really $72,000? Yes. Notice 2025-67 set the Section 415(c) defined-contribution limit at $72,000 for 2026. That is the cap; your own limit is 20% of net earnings, which reaches $72,000 only at $360,000 of compensation.
Do SEP contributions count against my personal IRA limit? No. Employer SEP contributions are separate from the $7,500 you may put in a traditional or Roth IRA for 2026. You can do both if you qualify.
Key takeaways
- The 2026 SEP IRA cap is $72,000, but a self-employed person's real limit is 20% of net earnings, not 25% of profit.
- Net earnings mean net profit minus half your self-employment tax, so the base is smaller than the Schedule C bottom line before the 20% even applies.
- On $100,000 of net profit the SEP maximum is about $18,587; a Solo 401(k) reaches $43,087 by adding the $24,500 employee deferral.
- The Solo 401(k) wins at modest income and offers age-50 catch-ups; the SEP wins on simplicity and its extension-friendly funding deadline.
- Twenty percent of the $360,000 compensation cap equals the $72,000 dollar cap, so that is the ceiling regardless of how high your income climbs.