SEP IRA for Self-Employed: Rules, Limits & Setup
SEP IRA contribution limits, tax benefits, employee rules, and how it compares to a solo 401(k) for freelancers and small business owners.
A SEP IRA lets self-employed people contribute up to 25% of net self-employment income, capped at $70,000 in 2025, with very little paperwork — but every eligible employee must receive the same percentage.
What you'll walk away with
Skim these first — then dig into the details below.
- 1Contribute up to 25% of net self-employment income, capped at $70,000 in 2025.
- 2Setup takes one form and can be completed at any major brokerage.
- 3You must contribute the same percentage for every eligible employee.
- 4SEP IRAs are pre-tax only — there is no Roth version.
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A SEP IRA is the simplest high-limit retirement plan available to self-employed people. There is no annual filing requirement, no plan document to maintain, and you can open one at any brokerage in an afternoon. For a freelancer with no employees, it turns a large tax bill into retirement savings.
Estimate what your contributions grow into with the 401(k) calculator, and coordinate the deduction with your quarterly estimated taxes.
Contribution limits and the math
The headline is 25%, but the effective rate for a sole proprietor is lower because of how net earnings are calculated.
- S-corp or C-corp owners: up to 25% of W-2 compensation.
- Sole proprietors and single-member LLCs: effectively about 20% of net self-employment income.
- The reduction reflects the deduction for half of self-employment tax and the contribution itself.
- The 2025 dollar cap is $70,000.
- Contributions are fully deductible and reduce your taxable income directly.
The employee rule to understand first
This is the single biggest constraint on SEP IRAs, and it becomes expensive as soon as you hire.
- Every eligible employee must receive the same contribution percentage you give yourself.
- Eligible generally means age 21 or older, employed three of the last five years, and earning at least $750.
- You cannot contribute 25% for yourself and 5% for staff.
- All contributions come from the business, not from employee salary deferrals.
- Contributions vest immediately and belong to the employee.
SEP IRA versus solo 401(k)
For a one-person business, a solo 401(k) usually allows a larger contribution at the same income and adds a Roth option.
- SEP: simpler setup, no annual filing, employer contributions only.
- Solo 401(k): allows both an employee deferral and an employer contribution, reaching the cap at much lower income.
- Solo 401(k) offers Roth contributions; SEP does not.
- Solo 401(k) permits loans; SEP does not.
- A SEP IRA balance also interferes with the backdoor Roth pro-rata rule; a solo 401(k) does not.
How to open and fund one
The process is genuinely simple, which is the SEP’s main appeal for freelancers with variable income.
- 1
Open a SEP IRA at Fidelity, Schwab, or Vanguard — there is no cost to establish one.
- 2
Complete IRS Form 5305-SEP and keep it in your records; you do not file it.
- 3
Calculate your maximum contribution after your net profit for the year is known.
- 4
Fund the account by your filing deadline, including extensions.
- 5
Invest the balance in low-cost index funds rather than leaving it in cash.
Disclaimer: This page includes AI-assisted educational content reviewed for general accuracy. It is not personalized financial, tax, or legal advice. Verify numbers with a qualified professional and our editorial standards.
Continue reading
Related guides that deepen the same decision.
Solo 401(k) Guide for Self-Employed & Freelancers
A solo 401(k) lets a self-employed person contribute both as employee (up to $23,500 in 2025) and as employer (about 20–25% of net income), reaching the $70,000 total cap at a much lower income than a SEP IRA.
ReadTaxesQuarterly Estimated Taxes: Deadlines & Calculation for Freelancers
If you expect to owe $1,000 or more at filing time, the IRS wants tax paid in four installments during the year — and paying 100% of last year’s tax bill in equal quarters keeps you penalty-free no matter what you actually earn.
ReadPersonal FinanceHow to Budget When You Have Side Income
Budget your life on your stable W-2 pay, deposit side income into a separate account, immediately reserve 25–30% for taxes, and pay yourself a fixed monthly amount from what is left.
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