SEP IRA Contribution Limits: How They Work for Side Income and Self Employment

November 5, 2026 Invest Clarity Path Team

If you earn money on the side, you may wonder how to save for retirement from that income. A full time job may come with a workplace plan, but freelance work, a small shop, or a side project often does not. A SEP IRA is one option that is made for that gap. It is a simple plan for self employed people and small business owners, and it can also cover income from side work.

How much can go into a SEP IRA?

A SEP IRA is a retirement plan for self employed people and small business owners. In 2026, the employer can put in up to 25 percent of compensation, and no more than $72,000. Only the employer contributes. For a sole proprietor, the 25 percent is worked out on net self employment income after set IRS adjustments, not on gross income.

What is a SEP IRA?

A SEP IRA stands for Simplified Employee Pension Individual Retirement Arrangement. In simple words, it is a retirement account that an employer sets up for each worker who can take part, including the owner. The employer puts money into each account, and the money is meant for retirement. The plan is called simplified because it has less paperwork than many other workplace plans. Each person has their own IRA, and the money in it belongs to that person from the start, with no waiting period to own it. The IRS calls this full and immediate vesting.

A SEP can work for a business with one person, such as a freelancer or a sole trader, and it can also work for a small business with a few workers. If a business has workers who can take part, the employer must put in the same percentage for each of them as for the owner. That rule keeps the plan fair, and it is a key part of how a SEP works. The employer can choose to put in less in one year, or to put in nothing, if the plan allows it.

Who can open a SEP IRA?

A SEP can be set up by a business of any size. The IRS lists sole proprietors, partnerships, and corporations among the businesses that can use a SEP. A person who is self employed can set one up for their own work, and that includes work done on the side. Freelance writing, design work, driving, tutoring, selling goods online, and other side work can all count as self employment, if the income is from work done for yourself and not as an employee of someone else. You do not need to have a big business or a large team to open a SEP.

How the contribution limit works

The contribution limit has two parts, and the smaller of the two is the limit. First, the employer can put in up to 25 percent of each worker’s compensation. Second, the amount for any one person cannot be more than a dollar cap set by the IRS. The IRS updates that cap over time. For 2026, the cap is $72,000. For 2025, the cap was $70,000. So in 2026, the most that can go into one person’s SEP IRA is the smaller of 25 percent of compensation and $72,000. In 2025, it was the smaller of 25 percent of compensation and $70,000.

Year	Most that can go in	Percent of compensation
2026	$72,000	25 percent
2025	$70,000	25 percent

There is also a limit on how much pay can be counted. For 2026, compensation above $360,000 is not counted for a SEP. For 2025, that limit was $350,000. So even if a person earns more than that amount, the 25 percent is worked out on no more than $360,000 in 2026, or $350,000 in 2025.

An employee must earn at least a small amount to be covered. The IRS set that minimum at $800 for 2026 and $750 for 2025.

The special rule for sole proprietors

For a sole proprietor, the 25 percent is not worked out on gross income. The IRS says a sole proprietor’s compensation is net earnings from self employment, reduced by one half of self employment tax and reduced by the contribution to their own SEP IRA. That means the base is lower than the gross amount earned. In plain terms, you first take your net self employment income, take off half of the self employment tax, and take off the SEP contribution itself, and the 25 percent applies to what is left. The IRS provides a worksheet in Publication 560 to work this out step by step.

When can you contribute?

Contributions do not have to be made by the end of the calendar year. In general terms, a contribution can be made up to the due date of the employer’s tax return for that year, including extensions. That gives a business time after the year ends to work out its income and decide how much to put in. The exact date depends on the type of business and whether it has asked for more time to file, so check the IRS page or ask a tax adviser if you are not sure.

Can you have a SEP and other IRAs?

Having a SEP does not stop you from having other IRAs, in general terms. You can also have a traditional IRA or a Roth IRA, and each type has its own rules, limits, and tax treatment. A SEP is a kind of traditional IRA, and money put into it is usually tax deductible for the employer, within the limits set by the IRS. It is best to check the rules for each account before you open one, because the rules can work together in ways that are easy to miss.

How a SEP differs from a 401(k)

A SEP differs from a 401(k) in one clear way. In a 401(k), an employee can put part of their own pay into the plan, and many employers also add a match. In a SEP, only the employer puts money in. There is no employee contribution and no match in the same sense. The employer decides the percentage, up to 25 percent, and puts in the same percentage for each worker who can take part. A SEP is usually simpler to run, with less paperwork, while a 401(k) can allow higher total savings in some cases, because the employee can also save from pay.

Worked example: 25 percent and the dollar cap

Example only. This is a made up example to show how the 25 percent and the dollar cap work together. It is not tax advice, and it is not a promise about any real plan.

Start with a small business owner who has one worker. The worker earns $80,000 in compensation in 2026. The employer has set the SEP rate at 25 percent. The sum is 25 percent of $80,000, which is $20,000. That amount is less than the 2026 cap of $72,000, so the contribution for that worker can be $20,000. If the same worker earned $400,000, the 25 percent would be worked out on no more than $360,000, which is $90,000, but the cap would cut it back to $72,000. For a sole proprietor, the base would first be reduced by half of the self employment tax and by the contribution itself, so the final amount would be lower than 25 percent of gross income.

Things to check before you contribute

Check the year. Use the cap for the right year, because the IRS updates it over time.
Do not use gross income for a sole proprietor. Use net earnings after the IRS adjustments.
Remember the same percentage must apply to each worker who can take part.
Do not miss the filing deadline, including extensions, for that year.
Check whether any of your workers must be covered, even if they work part time.

Quick answers

What is the SEP IRA contribution limit for 2026?

Up to 25 percent of compensation, and no more than $72,000. For 2025, the cap was $70,000. The smaller of the percentage and the cap is the limit.

Can a sole proprietor open a SEP IRA for side income?

Yes, in general terms. A self employed person can set up a SEP for income from freelancing or other side work. The 25 percent is worked out on net self employment income after IRS adjustments, not on gross income.

When is the deadline for SEP contributions?

In general terms, by the due date of the employer’s tax return for that year, including extensions. The exact date depends on the type of business and whether it asked for more time to file.

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