Calculate your 2026 SEP IRA contribution limit (25% of net SE income, max $70,000). Free tool for freelancers, consultants, sole proprietors.
For 2026, you can contribute up to $70,000 to a SEP IRA, or 25% of your net self-employment income (whichever is less). For employees (if you have any), the contribution is 25% of their W-2 wages, capped at the same $70,000 ceiling. The compensation cap used in calculations is $350,000, meaning earnings above that figure don't count toward your contribution base.
If you're self-employed (a sole proprietor, single-member LLC, or partner), the effective contribution rate is 20% of net self-employment earnings after the deductible portion of self-employment tax — not the 25% figure you'll see advertised. This catches almost every first-time SEP contributor off guard, and it's why the calculator below exists.
Disclaimer: This content is for educational purposes only and does not constitute financial advice. Consult a qualified financial advisor or CPA before making contribution decisions.
The IRS allows a maximum SEP contribution of 25% of "compensation." For W-2 employees, compensation is gross wages. For self-employed individuals, compensation is defined differently — it's net earnings from self-employment minus the deductible half of self-employment tax minus the SEP contribution itself. Because the contribution is part of the formula, the math is circular, which is why the effective rate works out to 18.587% (often rounded to ~20%).
Here's the step-by-step calculation for a sole proprietor:
Let's run a sole proprietor with $100,000 in Schedule C net profit through the full math:
If you'd naively applied 25% to $100,000, you'd think you could contribute $25,000 — and you'd over-contribute by $6,413, triggering a 6% excise tax annually until corrected.
| Limit Type | 2026 Amount | 2025 Amount |
|---|---|---|
| Maximum contribution | $70,000 | $69,000 |
| Compensation cap | $350,000 | $345,000 |
| Minimum compensation threshold (employees) | $750 | $750 |
| Effective rate (self-employed) | ~18.587% | ~18.587% |
| Catch-up contributions (age 50+) | Not allowed in SEP | Not allowed |
Note: SEP IRAs do not allow catch-up contributions. If you're 50+ and want catch-ups, look at a Solo 401(k), which allows an additional $7,500 catch-up for 2026.
This is the single most important question for self-employed savers, and the answer depends on income level.
At low-to-moderate income ($50,000–$150,000 net profit), the Solo 401(k) wins, often by a wide margin. That's because the Solo 401(k) lets you make both an employee elective deferral ($23,500 in 2026) and an employer profit-sharing contribution (25% of compensation), while the SEP only allows the employer-side piece.
Example with $80,000 Schedule C net profit:
At very high income ($300,000+), the gap narrows because both plans hit the $70,000 overall cap. At that point, the choice comes down to administrative complexity — SEP IRAs are simpler with no Form 5500 filing until plan assets exceed $250,000.
For a deeper comparison, see our Mega Backdoor Roth calculator if you're maxing out a Solo 401(k) and want to push more into Roth space.
SEP IRAs make the most sense in these scenarios:
SEP IRAs are not a good fit if you have W-2 employees, because you must contribute the same percentage for every eligible employee (anyone 21+, who's worked 3 of the last 5 years, and earned $750+ in 2026). That gets expensive fast.
SEP contributions are tax-deductible as a business expense on Schedule 1 (sole proprietors) or as a deduction from gross income for the business entity (S-corp, partnership). They reduce both income tax and, in the case of an S-corp owner taking salary, can offset wages used in W-2 calculations.
Key deadlines for 2026 contributions:
To calculate your maximum 2026 SEP IRA contribution:
For high earners hitting the $350,000 compensation cap: $350,000 × 20% = $70,000, so anyone netting roughly $375,000+ in self-employment income (accounting for SE tax) maxes out at $70,000 regardless.
1. Using 25% instead of 20% for self-employed. The most common error. Over-contributions face a 6% annual excise tax until removed.
2. Forgetting the SE tax deduction. Some calculators apply 20% directly to Schedule C net profit without the 0.9235 × 15.3% adjustment. This produces a slightly inflated contribution number.
3. Mixing SEP and Traditional IRA limits. SEP contributions are separate from your $7,000 personal IRA limit (2026). You can do both in the same year.
4. Skipping employees in eligibility calculations. If you have a part-time bookkeeper who's worked 3 of the last 5 years and earned $750, they're SEP-eligible and you must contribute the same percentage for them.
5. Establishing after the deadline. While SEPs are more forgiving than Solo 401(k)s, you still must open the account before your tax filing deadline (with extensions) for the contribution to count.
Yes. A SEP IRA contribution doesn't reduce your $7,000 Traditional IRA contribution limit ($8,000 if 50+). However, having a SEP IRA does make you "covered by a workplace retirement plan" for purposes of Traditional IRA deductibility — so if your modified AGI exceeds $89,000 (single) or $143,000 (married filing jointly) in 2026, your Traditional IRA deduction phases out.
For most self-employed filers earning $100,000+, the play is: max the SEP first, then contribute to a Backdoor Roth IRA using the non-deductible Traditional IRA → Roth conversion technique.
Yes, as long as the SEP contribution comes from self-employment income (1099, side business, consulting). Your 401(k) elective deferral limit ($23,500 in 2026) is independent of your SEP contribution, but the combined annual additions across all your plans cap at $70,000 — so if your employer 401(k) sees $30,000 in total contributions, you can still contribute up to $40,000 to your SEP if your self-employment income supports it.
SIMPLE IRAs are designed for small businesses with employees and have lower limits ($16,500 employee deferral + ~3% employer match in 2026). SEP IRAs are typically used by self-employed individuals or owner-only businesses and have a much higher ceiling ($70,000). SEPs are funded entirely by the employer; SIMPLEs allow employee deferrals.
SECURE 2.0 (signed 2022) authorized Roth SEP IRAs, but adoption has been slow because most custodians haven't built the infrastructure yet. As of 2026, a handful of providers (Fidelity, Schwab in limited cases) offer Roth SEP. If your custodian doesn't support it, your contribution must be pre-tax. You can later convert SEP balances to Roth via in-service conversions, paying ordinary income tax on the converted amount.
The excess amount is subject to a 6% excise tax (Form 5329) for every year the excess remains in the account. To fix it: withdraw the excess plus earnings before your tax filing deadline (including extensions). If discovered after the deadline, you can apply the excess to next year's contribution, but you still owe the 6% for the current year.
S-corp owners use the 25% of W-2 wages rate — not the 20% self-employed effective rate. That's because the S-corp pays you a W-2 salary, and only that salary counts as compensation. S-corp distributions (K-1 income) are not eligible for SEP contributions. This makes the "reasonable salary" decision strategically important: too low and you cap your SEP, too high and you pay extra payroll tax.
Last updated: May 15, 2026 | Author: Ziv Shay
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