SEP IRA (Simplified Employee Pension) = retirement plan for self-employed individuals and small business owners allowing contributions up to **25% of compensation** or **$69,000 for 2025** (whichever is less).

Contributions are tax-deductible, reducing taxable income dollar-for-dollar.

**SEP IRA contribution formula** (2025):.

For W-2 employees of your own S-Corp/C-Corp: - Maximum contribution = 25% of W-2 compensation - Hard cap = $69,000.

**Example 1** (S-Corp owner, W-2 salary $150,000): - Maximum SEP contribution = $150,000 × 25% = $37,500 - Tax savings (32% bracket) = $37,500 × 0.32 = **$12,000 tax reduction**.

For self-employed (Schedule C, sole proprietor, single-member LLC): - Maximum contribution = **20%** of net self-employment income (after deducting ½ SE tax) - Effective rate is 20%, not 25%, due to SE tax deduction calculation.

**Example 2** (Freelancer, net Schedule C income $100,000): - Self-employment tax = $100,000 × 92.35% × 15.3% = $14,130 - Net earnings after ½ SE tax = $100,000 - $7,065 = $92,935 - Maximum SEP contribution = $92,935 × 20% = **$18,587** - Tax savings (24% bracket) = $18,587 × 0.24 = **$4,461**.

**2025 SEP IRA contribution limits**: - Maximum contribution: $69,000 (increased from $66,000 in 2024) - Maximum compensation considered: $345,000 (increased from $330,000) - Minimum age: None (can contribute at any age if you have earnings) - No catch-up contributions (unlike 401k).

**Who is eligible for SEP IRA?**: ✅ Self-employed individuals (sole proprietors, freelancers, contractors) ✅ Business owners (LLC, S-Corp, C-Corp, partnership) ✅ Employers with employees (must contribute same % for all eligible employees) ✅ Part-time self-employment income (even if you have W-2 job elsewhere).

**Employee eligibility requirements**: If you have employees, you MUST contribute the same percentage you contribute for yourself.

Employee is eligible if: - Age 21 or older - Worked for you in 3 of the last 5 years - Earned at least $750 in 2025 ($650 in 2024).

**Example 3** (Small business with employees): - Owner W-2: $200,000, contributes 20% = $40,000 - Employee A W-2: $60,000, you must contribute 20% = $12,000 - Employee B W-2: $40,000, you must contribute 20% = $8,000 - **Total cost**: $60,000 (all tax-deductible).

**SEP IRA vs other retirement plans** (2025 comparison):.

| Feature | SEP IRA | Solo 401k | SIMPLE IRA | |---------|---------|-----------|------------| | Max contribution (self-employed) | $69,000 | $69,000 + $23,000 elective = $92,000 | $16,000 + 3% match | | Employee contributions | No (employer only) | Yes (elective deferrals) | Yes (elective deferrals) | | Catch-up (50+) | No | Yes (+$7,500) | Yes (+$3,500) | | Employee requirement | Must contribute for eligible employees | Solo/spouse only | All employees | | Setup complexity | Very simple (1-page form) | Medium (trust, plan docs) | Simple | | Annual filing | No | Yes (Form 5500 if >$250k) | No | | Loan provision | No | Yes | No |.

**Tax deduction calculation**:.

SEP contributions reduce taxable income, not tax owed directly.

**Example**: Freelancer earns $120,000 net Schedule C income - Without SEP: Taxable income $120,000, tax (24% bracket) = $28,800 - With $20,000 SEP: Taxable income $100,000, tax = $24,000 - **Tax savings** = $4,800.

**Contribution deadline**: - Regular deadline: Tax filing deadline (April 15, 2026 for 2025 tax year) - With extension: October 15, 2026 (if you file extension) - You can establish SEP IRA and make contributions up to tax filing deadline + extension.

**2025 SEP IRA advantages**: ✅ High contribution limits (up to $69,000) ✅ Very simple to set up (15 minutes, IRS Form 5305-SEP) ✅ No annual IRS filing requirements ✅ Flexible contributions (can vary year-to-year, including $0 in bad years) ✅ Tax-deductible contributions (reduce income tax immediately) ✅ Low administrative costs (typically $20-$50/year custodian fee).

**2025 SEP IRA disadvantages**: ❌ No catch-up contributions (unlike 401k $7,500 age 50+) ❌ Must contribute same % for all eligible employees (expensive if you have staff) ❌ No Roth option (all contributions pre-tax) ❌ No loan provision (money locked until 59½) ❌ Lower limit for self-employed than Solo 401k ($69k vs $92k).

Choose **Solo 401k** if you want maximum contributions ($92,000 vs $69,000), Roth option, or age 50+ catch-up.

Choose **SEP IRA** if you want simplicity, no annual filing, or flexibility to add employees later.

For most high-earning self-employed without employees, Solo 401k is better.

**Decision framework** (choose the plan that matches your situation):.

**Choose Solo 401k if**: ✅ Age 50+ (want $7,500 catch-up contribution) ✅ Want to maximize contributions >$69k (can reach $92k with elective deferrals) ✅ Want Roth option (Roth 401k contributions available) ✅ No employees (just you, or you + spouse) ✅ Want loan provision (can borrow up to $50k from plan) ✅ Want mega backdoor Roth strategy (after-tax contributions → Roth conversion).

**Choose SEP IRA if**: ✅ Want simplest setup (5 minutes vs 30 minutes) ✅ Want zero annual filing (Solo 401k requires Form 5500 if assets >$250k) ✅ Have employees (SEP is easier to administer for staff) ✅ Variable income (flexibility to contribute 0-25% any year) ✅ Want to minimize administrative hassle.

**Side-by-side comparison** (self-employed earning $200k net):.

**SEP IRA scenario**: - Net self-employment income: $200,000 - After ½ SE tax: $200,000 - $14,130/2 = $192,935 - Maximum SEP contribution: $192,935 × 20% = **$38,587** - Tax savings (35% bracket): $13,505 - Setup time: 5 minutes - Annual admin: None - Total retirement savings: $38,587.

**Solo 401k scenario**: - Elective deferral (employee contribution): $23,000 (2025 limit) - Employer contribution: $192,935 × 20% = $38,587 - **Total contribution**: $23,000 + $38,587 = **$61,587** - Tax savings (35% bracket): $21,555 - Setup time: 30 minutes (more complex plan docs) - Annual admin: Possible Form 5500 if assets >$250k - Total retirement savings: **$61,587 (59% more than SEP)**.

**Age 50+ comparison** (even bigger difference):.

**SEP IRA** (age 55, $200k income): - Maximum contribution: $38,587 (same as under 50) - No catch-up allowed.

**Solo 401k** (age 55, $200k income): - Elective deferral: $23,000 - Catch-up contribution: $7,500 - Employer contribution: $38,587 - **Total**: $23,000 + $7,500 + $38,587 = **$69,087** - **Advantage over SEP**: +$30,500/year (78% more).

**Break-even analysis** (when is SEP worth the lower limit?):.

SEP makes sense if: - Income <$80k/year (SEP limit not constraining) - You value extreme simplicity (no annual forms) - You anticipate hiring employees (SEP easier to administer).

**Example**: Freelancer earning $60,000 net - SEP max: $60,000 × 20% = $12,000 - Solo 401k max: $23,000 elective + $12,000 employer = $35,000 - But: If you only want to save $12k, SEP is simpler and achieves same goal.

**Real-world scenarios**:.

**Scenario 1**: Consultant, age 45, $150k income, no employees, stable income - **Recommendation**: Solo 401k - Reason: Can contribute $50k+ vs $30k with SEP, no admin burden (no employees), worth 30-minute setup.

**Scenario 2**: Freelancer, age 32, $80k income, wants simplicity, may hire assistant in 2 years - **Recommendation**: SEP IRA - Reason: Current contribution would be similar ($16k), easier to add employees later, simpler.

**Scenario 3**: S-Corp owner, age 55, $250k salary, no employees - **Recommendation**: Solo 401k 100% - Reason: Age 50+ catch-up ($7,500), can do Roth option, potential mega backdoor Roth.

**Scenario 4**: Part-time side business, $30k income, already have W-2 401k at day job - **Recommendation**: SEP IRA - Reason: Simple to set up for side income, can max 401k at day job ($23k), use SEP for employer portion (~$6k).

**Can you have both?** No, contribution limits are aggregated. - If you max 401k at W-2 job ($23k), you can still set up SEP for side business (employer portion only) - Total combined employer contributions cannot exceed $69k.

**Switching from SEP to Solo 401k**: Yes, you can switch, but: - Close SEP contributions for current year - Open Solo 401k by Dec 31 (for current tax year contributions) - Can rollover SEP IRA to Solo 401k (consolidate accounts).

**2025 tax strategy considerations**:.

**SEP IRA advantages**: - Deadline flexibility: Contribute up to tax filing deadline + extension (Oct 15, 2026 for 2025) - Can establish SEP even after year-end (Solo 401k must be set up by Dec 31) - Easier to manage if you have variable income year-to-year.

**Solo 401k advantages**: - Roth contributions: Pay tax now, grow tax-free forever - Mega backdoor Roth: If plan allows after-tax contributions, convert to Roth (advanced strategy) - Loan provision: Borrow up to $50k or 50% of account (for emergencies, not recommended) - Higher limits: $92k vs $69k (if age 50+, up to $99.5k).

**Bottom line recommendation**:.

| Your Situation | Best Choice | |---------------|-------------| | Age 50+, high income, no employees | Solo 401k | | Age <50, income >$150k, no employees | Solo 401k | | Want Roth option | Solo 401k | | Want extreme simplicity, low income | SEP IRA | | Have employees (or plan to hire) | SEP IRA | | Variable income, want flexibility | SEP IRA | | Want to minimize annual admin | SEP IRA |.

For 70% of self-employed individuals with no employees and income >$100k, **Solo 401k is the better choice** due to higher contribution limits and Roth option.