SEP-IRA Contribution Calculator
A Simplified Employee Pension (SEP) IRA is a retirement plan available to self-employed individuals and small business owners that allows employer contributions of up to 25% of each eligible employee's compensation, or for self-employed individuals, up to 20% of net self-employment income after the self-employment tax deduction. For 2025, the maximum SEP-IRA contribution is $70,000 per participant. SEP-IRA contributions are made entirely by the employer; employees do not make elective deferrals as they do in a 401(k). If you have employees, you must contribute the same percentage of compensation to each eligible employee's SEP-IRA as you contribute to your own account. Contributions are deducted from business income, reducing taxable income dollar for dollar up to the limit. Because the SEP-IRA limit is tied to compensation rather than a flat dollar amount, the maximum contribution requires calculating net self-employment income: gross business revenue minus business expenses, minus half of self-employment tax, multiplied by the 20% effective rate. For a self-employed person earning $200,000 net, the maximum contribution would be approximately $37,500 before the flat cap applies. This calculator computes your net self-employment income, the effective contribution percentage, the maximum contribution, the income tax saving, and the projected tax-deferred growth of your SEP-IRA balance over your chosen number of years until retirement.
With net self-employment income of $100,000 and a 25% contribution rate, your maximum deductible SEP-IRA contribution is $18,587.05.
SEP-IRA contribution calculation
A SEP-IRA allows self-employed individuals to contribute up to 25% of compensation. For self-employed workers, the calculation accounts for self-employment tax because the net income on which the percentage is based must be reduced by half of the SE tax.
Step 1: Calculate self-employment tax
Self-employment tax = Net SE income x 0.9235 x 15.3%
This is the combined employer and employee portion of Social Security and Medicare tax.
Step 2: Calculate net earnings
Net earnings = Net SE income - (Self-employment tax / 2)
The deductible portion of SE tax reduces the base for the 25% calculation.
Step 3: Calculate maximum contribution
Max contribution = Net earnings x (contribution rate / (1 + contribution rate))
For 25%: Net earnings x (25 / 125) = Net earnings x 0.20
Subject to $70,000 annual dollar limit (2025).
Worked example
Net SE income $100,000, 25% contribution rate:
- Self-employment tax = 100,000 x 0.9235 x 0.153 = $14,130.00
- Net earnings = 100,000 - (14,130 / 2) = $92,935.00
- Max contribution = 92,935 x 0.20 = $18,587.00
- No dollar cap applies (under $70,000)
- Final contribution = $18,587.00
- Tax savings (at 24% federal + 5% state) = $18,587 x 0.29 = $5,390.23
SEP-IRA vs. solo 401k vs. SIMPLE IRA
For self-employed individuals without employees, a SEP-IRA is simpler to maintain than a solo 401k because it has no annual compliance documents. However, a solo 401k allows higher total contributions ($70,000+ including catch-up) because it includes employee deferrals. A SIMPLE IRA is available to employers with 100 or fewer employees and has lower limits than both.
If you have employees, a SEP-IRA is attractive because you must contribute the same percentage for all eligible employees. This simplifies planning when headcount changes. However, you cannot make employee deferrals (the contributions are employer-funded only).
Once a SEP-IRA is established, you can vary your contribution percentage from year to year based on business performance. In a year with lower profits, you can contribute a lower percentage or nothing at all. This flexibility is valuable for businesses with variable income.
Why a 25% SEP-IRA only shelters about 20% of your profit
The number that surprises most self-employed savers is that a 25% plan actually shelters only about 20% of profit. The reason is circular: your own contribution is itself part of compensation, so the 25% must be applied to earnings after the contribution is removed. That resolves algebraically to 25 divided by 125, or 20% of net earnings, which is why a $100,000 Schedule C profit supports a maximum contribution near $18,587 rather than $25,000.
Two ceilings then sit on top of that percentage. Compensation counted for the formula is capped ($350,000 for 2025), and the contribution itself cannot exceed the annual dollar limit ($70,000 for 2025). A high earner hits the flat dollar cap well before the 25% rule would otherwise allow, so the effective rate quietly falls as income rises.
One planning point this tool cannot show: a SEP-IRA and a solo 401(k) cannot both draw on the same self-employment income, and for many one-person businesses the solo 401(k) wins because its employee deferral stacks on top of the 20% employer piece. The SEP-IRA's real edge is timing and simplicity. You can open and fund it right up to your filing deadline, including extensions, and dial the percentage down to zero in a lean year with no penalty and no annual paperwork.
SEP-IRA: frequently asked questions
What is a SEP-IRA?
A SEP-IRA (Simplified Employee Pension) is a qualified retirement plan for self-employed individuals and small business owners. The employer contributes a percentage of each eligible employee's compensation (the same percentage for all employees). Contributions are tax-deductible, and earnings grow tax-deferred. SEP-IRAs are simpler to administer than traditional 401k plans and have no ongoing compliance requirements.
What is the maximum contribution percentage?
The maximum contribution is 25% of compensation. For self-employed individuals, this is approximately 20% of net self-employment income after deducting the contribution and half of SE tax. The exact formula is: (net SE income x 0.9235 x 0.153 / 2) reduces net income, then 25% of the result is deductible. Most calculators simplify this to about 20%.
Can I contribute different amounts for different employees?
No. A SEP-IRA requires that you contribute the same percentage of compensation for all eligible employees. If you contribute 15% for one employee, you must contribute 15% for all employees. This is a significant advantage of SEP-IRAs over solo 401k plans for businesses with employees, as it provides flexibility to scale contributions based on business performance.
Are there employee income limits for SEP-IRA contributions?
There are no income limits for SEP-IRA contributions (though Roth IRA conversions and contributions have income limits). The only limit is the annual dollar cap of $70,000 (2025) and the percentage rule of 25%. An employee making $500,000 can receive a contribution up to the dollar limit, while an employee making $50,000 receives 25% of $50,000.
Can I have both a SEP-IRA and a solo 401k?
No. You cannot maintain both a SEP-IRA and a solo 401k for the same self-employment income. However, you can have a SEP-IRA for your business and a separate 401k if you have W-2 employment income from another source. Consult a tax professional if you have complex employment situations.
What is the deadline to establish and contribute to a SEP-IRA?
A SEP-IRA must be established by the tax return filing deadline (including extensions) for the year in which you want to claim the deduction. For most self-employed individuals, that is April 15 (or October 15 with extension) for the prior tax year. Contributions themselves must be made by that same date.
Official sources
- SEP-IRA plan details and FAQs: IRS SEP Plan FAQs.
- Complete SEP-IRA rules and limits: IRS Publication 560: Self-Employed Plans.
- 2025 contribution limits: IRS Rev Proc 2024-40.
Reviewed by the CalculatorHub team, edited by James Graham, 13 June 2026. See our methodology. General information, not financial advice.