A SEP account is a retirement savings account designed for self-employed people and small business owners
SEP stands for Simplified Employee Pension. It is a retirement account that lets you set aside pre-tax money for retirement, similar to a 401(k) at a larger employer. The key difference: a SEP is much simpler to set up and maintain, and the contribution limits are higher — you can put away up to 25% of your net self-employment income each year, with a maximum of $69,000 per year (as of 2024, though this amount changes annually).
You open a SEP through a bank, brokerage, or investment firm. Once it is open, you decide each year how much to contribute — there is no minimum, and you are not locked into the same amount every year. The money grows tax-free until you withdraw it in retirement, typically starting at age 59½. If you withdraw before that age, you usually pay income tax plus a 10% penalty, with some exceptions.
A SEP is one of several retirement account types available to self-employed people. Others include a Solo 401(k), a SIMPLE IRA, and a regular IRA. A SEP is often the simplest choice if you have no employees (or only a few), because the paperwork and annual filing requirements are minimal compared to a 401(k).
Key Takeaways
- A SEP account lets self-employed people and small business owners save up to 25% of net self-employment income for retirement, with a 2024 maximum of $69,000 per year.
- You open a SEP through a bank or brokerage, decide your contribution amount each year with no minimum required, and the money grows tax-free until withdrawal.
- If you have employees, you must contribute the same percentage of their salary to their SEP accounts as you contribute to your own, which can make a SEP expensive if you have staff.
- Withdrawals before age 59½ typically trigger income tax plus a 10% penalty, though some exceptions exist for hardship or disability.
- A SEP requires less paperwork than a Solo 401(k) or traditional 401(k), making it a common choice for solo self-employed people with no employees.
How contributions work and what you can set aside
Your SEP contribution is based on your net self-employment income — the profit you make after business expenses. The formula is roughly 25% of that income, though the exact percentage depends on how you calculate self-employment tax. If you earned $50,000 in net self-employment income, you might contribute around $11,000 to $12,000 to your SEP, depending on your specific situation.
You do not have to contribute the same amount every year. In a year when business is slow, you can contribute less or nothing at all. In a good year, you can contribute more. This flexibility is one reason many self-employed people prefer a SEP over a Solo 401(k), which requires more consistent contributions and has stricter rules.
The contribution deadline is usually your tax filing deadline — April 15 of the following year, or October 15 if you file an extension. You can open a SEP and make your contribution right up to that deadline, even if you have not opened one before. This means you can wait until you know your final income for the year before deciding how much to contribute.
If you have employees, the rules change significantly
A SEP becomes more expensive if you have employees. The law requires you to contribute the same percentage of salary to each employee's SEP account as you contribute to your own. If you contribute 15% of your net self-employment income to your SEP, you must contribute 15% of each employee's salary to their SEP accounts as well.
This rule applies to any employee who has worked for you for at least three of the past five years and earned at least $750 in the current year. Part-time and seasonal employees may be excluded depending on how you structure the plan. If you have several full-time employees, the cost of matching contributions can quickly outweigh the simplicity benefit of a SEP.
For this reason, many business owners with employees choose a Solo 401(k) instead, which lets you contribute to your own account without contributing to employee accounts (though you still must offer the same retirement plan to all may be able to access employees). Others use a SIMPLE IRA, which has lower contribution limits but lower employer contribution requirements.
How the money grows and when you can withdraw it
Money in a SEP grows tax-free. You do not pay income tax on the growth each year, only when you withdraw the money in retirement. This tax deferral is the main advantage of a SEP over a regular taxable savings account.
You can withdraw money starting at age 59½ without penalty. At that point, you pay income tax on the withdrawal at your ordinary tax rate, but no additional penalty. If you withdraw before age 59½, you typically owe income tax plus a 10% early withdrawal penalty on the amount withdrawn.
Some exceptions to the early withdrawal penalty exist: disability, medical expenses that exceed 7.5% of your adjusted gross income, and a few others. You still owe income tax on the withdrawal, but the 10% penalty is waived. At age 73, you must begin taking required minimum distributions (RMDs) — the IRS requires you to withdraw a certain amount each year based on your age and account balance.
SEP accounts compared to other self-employed retirement options
| Account Type | Contribution Limit (2024) | Best For | Employee Contributions Required? |
|---|---|---|---|
| SEP IRA | Up to 25% of net self-employment income; $69,000 max | Solo self-employed with no employees | Yes, same percentage as owner |
| Solo 401(k) | Up to $69,000 employee deferral + 25% of net income | Self-employed wanting higher limits and more control | No, unless you hire employees later |
| SIMPLE IRA | $16,000 employee deferral; 3% employer match | Small business with a few employees | Yes, 3% match or 2% non-elective |
| Traditional IRA | $7,000 per year | Anyone with earned income, but lower limits | No |
A SEP is simpler to administer than a Solo 401(k) because it requires less paperwork and no annual IRS filing. However, a Solo 401(k) lets you contribute more if you have high self-employment income, and it does not require you to contribute to employee accounts unless you hire staff later. A SIMPLE IRA is designed for businesses with employees and has lower contribution limits but lower administrative burden than a 401(k).
The right choice depends on whether you have employees, how much income you earn, and how much paperwork you want to handle. Many solo self-employed people find a SEP the best fit because of its simplicity and flexibility.
Opening a SEP and filing requirements
You open a SEP by contacting a bank, brokerage, or investment firm and requesting a SEP IRA account. Most large financial institutions offer them. You will fill out a form — usually called a SEP-IRA adoption agreement — that establishes the plan. This is a simple one-time step; there is no IRS approval process.
Once the account is open, you contribute money each year by the tax filing deadline. You do not file a separate form with the IRS to open a SEP, and you do not file annual reports unless you have employees. If you have employees, you must provide them with a copy of the plan document and notify them of their rights.
On your personal tax return, you deduct your SEP contribution on Schedule C (if you are a sole proprietor) or on the appropriate business return form. The contribution reduces your taxable income for the year, which lowers your income tax bill. Keep records of your contributions and the SEP-IRA adoption agreement in case the IRS asks questions about your account.
Frequently Asked Questions
Can I have both a SEP and a regular IRA?
Yes, you can have both. However, if you have a SEP, your ability to deduct contributions to a traditional IRA may be limited depending on your income. A Roth IRA has no such restriction. Consult a tax professional about your specific situation, as the rules depend on your filing status and income level.
What happens to my SEP if I hire an employee?
Your existing SEP continues, but you must now contribute the same percentage to each may be able to access employee's account as you contribute to your own. If this becomes too expensive, you can close the SEP and switch to a Solo 401(k) or SIMPLE IRA, though you cannot move money out of the SEP without tax consequences unless you roll it into another retirement account.
Can I withdraw money from my SEP before retirement?
Yes, but you will owe income tax on the withdrawal plus a 10% penalty if you are under 59½, with limited exceptions for disability or significant medical expenses. The penalty makes early withdrawal expensive, so a SEP is best used as money you do not plan to touch until retirement.
Do I need to make a SEP contribution every year?
No. You can contribute in years when business is good and skip contributions in slow years. This flexibility is one advantage of a SEP over a Solo 401(k), which has stricter contribution rules. However, if you have employees, you must contribute the same percentage to their accounts in any year you contribute to your own.
What is the difference between a SEP and a Solo 401(k)?
A SEP is simpler to set up and maintain, with no annual IRS filing required. A Solo 401(k) allows higher total contributions if you have high income and gives you more investment control, but it requires more paperwork. Both work well for self-employed people with no employees; the choice depends on your income level and how much administrative work you want to handle.