SEP IRA for Business Owners and the Self-Employed

A SEP IRA is available to anyone with self-employment income or business income, including:

• Sole proprietors and freelancers earning income reported on Schedule C
• Independent contractors receiving 1099 income
• Small business owners with or without employees
• Partners in a partnership with self-employment income
• S-corporation shareholders who receive compensation from their corporation

If you have employees, there are rules around who must be included in the plan. Generally, eligible employees — those who are at least 21, have worked for you in at least three of the last five years, and meet a minimum compensation threshold — must receive the same percentage contribution as you contribute for yourself. This is one reason many small business owners with employees consider other plan structures as their team grows.

This is where the SEP IRA stands out. For 2025, contributions can be made up to 25% of eligible compensation, or $70,000 — whichever is less. For 2026, that ceiling increases to $72,000. You have until your tax filing deadline — including extensions — to make SEP IRA contributions for the prior year, which means 2025 contributions can be made as late as October 15, 2026 if you file an extension.

For context, the standard IRA contribution limit is $7,500 in 2026. The SEP IRA allows contributions up to nearly ten times that amount, depending on income.

For self-employed individuals, the calculation works out slightly differently in practice. SEP IRA contributions are employer-only — there is no separate employee contribution component. However, the IRS requires you to first deduct half of your self-employment tax from your net self-employment income before applying the 25% rate. Due to the circular nature of that calculation, the effective contribution rate works out to approximately 20% of net self-employment income. A qualified tax advisor can help you calculate the exact figure for your situation.

Contributions are flexible — you are not required to contribute every year, and the amount can vary. This makes the SEP IRA particularly appealing for business owners whose income fluctuates.

Yes. Like a traditional IRA, a SEP IRA can be held at a specialized custodian and invested in alternative assets — private equity, commercial real estate, private credit, and more. A self-directed SEP IRA combines the high contribution limits of the SEP structure with the investment flexibility of a self-directed account.

For business owners and high earners looking to deploy meaningful capital into private markets on a tax-advantaged basis, this combination can be particularly powerful.

Both accounts serve self-employed individuals and can support significantly higher contributions than a standard IRA. The right choice depends on your income level, business structure, and goals — and is worth discussing with an advisor.

A few key differences:

• SEP IRA contributions are employer-only. A Solo 401(k) allows both employee and employer contributions, which can result in higher total contributions at lower income levels.
• SEP IRAs have no Roth option. A Solo 401(k) can be structured as a Roth.
• SEP IRAs are simpler to set up and maintain. Solo 401(k)s have more administrative requirements and may require annual IRS filings above certain asset thresholds.
• If you have employees other than a spouse, a Solo 401(k) is generally not available to you.

A dedicated guide to the Solo 401(k) is coming — but if you are deciding between the two, speaking with a financial advisor or CPA is the most reliable path.