A SEP-IRA is the simplest employer retirement plan for the self-employed: the business contributes up to 25% of each participant's W-2 compensation (about 20% of net self-employment earnings after the required adjustments), capped at $70,000 for 2025, with no annual filing and near-zero administration. Contributions are discretionary year to year and, uniquely, a SEP can be opened and funded as late as the extended due date of the return, making it the classic retroactive deduction discovered at tax time. The tradeoffs: no employee deferral component, so at moderate incomes a solo 401(k) shelters far more; no participant loans; and the same contribution percentage must be given to every eligible employee, which gets expensive with staff. SEP balances are pre-tax IRAs, so they trigger the pro rata rule and quietly break the backdoor Roth strategy for high earners. Many owners start with a SEP for simplicity and graduate to a solo 401(k) or add a defined benefit plan as income grows.
SEP-IRA
Primary authority: IRC §408(k)
The authority behind it
IRC §408(k)
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
In March, a freelancer's accountant finds a $40,000 tax bill for last year. She opens a SEP-IRA before filing and contributes $30,000 based on last year's income, cutting the bill by roughly $10,000 at her marginal rate.
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Related terms
Solo 401(k)
A solo 401k is a full-featured 401k for a business owner with no employees other than a spouse.
Read the definition →
Defined Benefit Plan
A defined benefit plan is a pension your own business promises to fund, and it supports the largest deductible...
Read the definition →
Backdoor Roth IRA
The backdoor Roth IRA is a two-step maneuver that gets money into a Roth IRA for taxpayers whose income exceeds the...
Read the definition →
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