Just this past March 2025, a new client, a freelance marketing consultant, slid a tax projection across my desk showing she owed nearly $40,000 to the IRS. She thought her only option was to write the check. She was wrong.
My take? A SEP IRA isn’t a retirement account you fund with your profits; it’s a strategic weapon you use to create massive tax deductions out of thin air.
We were able to establish and fund a SEP IRA for the previous tax year, cutting her tax bill by over $8,000. Yes, just by knowing the SEP IRA Contribution limits and deadlines, she saved $8,000 in taxes immediately.
Data from the U.S. Government Accountability Office (GAO) shows that less than 20% of self-employed individuals without employees have a retirement plan. That’s a massive, untapped source of tax savings.
Is your business leaving its biggest legal deduction on the table?
Key Takeaways Ahead
The 2025 SEP IRA Contribution Limit (And the 25% Rule Most Articles Get Wrong)
For the 2025 tax year, the SEP IRA contribution limit is the lesser of $70,000 or 25% of compensation, with the maximum recognizable compensation capped at $350,000, according to none other than the IRS.
This sounds simple, right? But here’s the critical detail where most guides fail you, causing endless confusion: the “25% of compensation” calculation is fundamentally different for W-2 employees versus a self-employed individual.
SEP IRA Contributions for Employees (The Simple Math)
If you are a small business owner contributing for your employees, the calculation is straightforward. You can contribute up to 25% of their gross W-2 salary.
- Example: An employee earns a salary of $80,000. You can contribute up to $20,000 (25% of $80,000) to their SEP IRA.
SEP IRA Contributions for the Self-Employed (The Real Math)
This is where the rubber meets the road. In late 2024, I had a client, a successful graphic designer, who came to me ready to contribute $25,000 to his SEP IRA based on his $100,000 Schedule C net profit.
I had to stop him.
You cannot simply take 25% of your net profit. The IRS requires a convoluted formula based on your net adjusted self-employment income. His actual maximum contribution was only $18,587.
That quick check saved him from a potential 6% excise tax penalty on the nearly $6,500 over-contribution.
⚠️ Contribution Warning: No Catch-Up Contributions
Unlike a 401(k) or Traditional IRA, SEP IRAs do **not** allow for catch-up contributions for individuals age 50 and over. The $70,000 or 25% of compensation limit is the absolute maximum, regardless of your age.
The SEP IRA Contribution Deadline for the 2025 Tax Year (Your Last-Minute Advantage)
This is one of the SEP IRA’s greatest features. The deadline for making your 2025 contribution is your business’s federal income tax return due date, including extensions.
- Standard Deadline: April 15, 2026
- Deadline with Tax Filing Extension: October 15, 2026
I had a client, a consultant, who got a surprise bonus in July 2025 for work she did in 2024. Because she had filed an extension, she was able to make a large SEP IRA contribution in August and have it count toward her 2024 tax return, saving her thousands.
This flexibility is a game-changer, but it comes with a critical catch.
💡 Michael Ryan Money Tip
Filing an extension gives you more time to fund your SEP IRA, but it does not give you more time to pay your taxes. As detailed by sources like Carry, your estimated tax payment for 2025 is still due on April 15, 2026. Failing to pay by then can result in late-payment penalties.
SEP IRA Eligibility Rules: Who Can Contribute in 2025?
Understanding the eligibility and contribution rules is crucial, especially if you have employees.
Rule #1: Only the Employer Contributes
Employees cannot contribute to a SEP IRA. All contributions are made by the employer (which is you, if you’re self-employed).
Employees can still contribute to their own separate Traditional or Roth IRA.
Rule #2: The Uniform Contribution Rule
This rule is non-negotiable. You must contribute the same percentage of compensation for every single eligible employee that you contribute for yourself.
- Example: If you decide to contribute 15% of your own compensation to your SEP IRA, you must also contribute 15% of compensation for every eligible employee.
Employee Eligibility Requirements:
According to Kiplinger, you generally must include any employee who:
- Is at least 21 years old.
- Has worked for your business in at least 3 of the last 5 years.
- Received at least $750 in compensation from you in 2025 (this amount may be adjusted for 2026).
The Scalability Trap: What Happens When You Hire Your First Employee?
The SEP IRA is fantastic when it’s just you. But the moment you hire your first eligible employee, the game changes because of the “Uniform Contribution” rule.
I had a client, a successful architect, who was contributing 20% for herself. She hired a junior architect and a part-time admin. Suddenly, she was legally required to contribute 20% of their salaries, too. Her simple retirement plan became a major business expense she hadn’t budgeted for.
If you plan to grow your team, you must factor this non-negotiable cost into your business plan from day one.
SEP IRA vs. Solo 401(k): The 2025 Showdown for the Self-Employed
Choosing between a SEP IRA and a Solo 401(k) isn’t about which one is ‘better’; it’s about which one fits your business’s operational DNA. A client was set on a SEP for simplicity, but he mentioned needing capital for new equipment. The Solo 401(k)’s loan provision—a feature completely absent in SEP IRAs—became the deciding factor.
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| 2025 Max Contribution | $70,000 (Employer only) | $70,000 (Combined Employee + Employer) |
| Catch-Up Contribution (50+) | No | Yes ($7,500 employee contribution) |
| Roth (after-tax) Option? | No | Yes (for employee contributions) |
| Can You Take a Loan? | No | Yes (up to $50,000) |
| Best For | Simplicity and ease of setup, or small businesses with employees. | Self-employed individuals who want to contribute the absolute maximum, need a Roth option, or want the ability to take a loan. |
How to Avoid Costly IRS Penalties and Common Mistakes
The SEP IRA is simple to open, but precise to fund. Don’t confuse simplicity with a license for sloppy math.
Oops, I Over-Contributed. Now What?
If you contribute more than the allowed limit, you may be subject to a 6% excise tax penalty on the excess amount. If you realize you’ve made this mistake, don’t panic – act.
You can avoid the penalty by withdrawing the excess contribution plus any earnings it generated before your tax filing deadline. You’ll report the correction to the IRS using Form 5329, Additional Taxes on Qualified Plans.
🧠 Michael Ryan Money’s Deep Dive: Why is the Self-Employed Calculation So Weird?
The reason for the complex formula is that your SEP IRA contribution is itself a deductible business expense. You end up with a circular calculation: your contribution depends on your net income, but your net income depends on your contribution. The IRS’s effective 20% rate for the self-employed is the simplified solution to that ‘chicken-and-egg’ math problem.
Your Next Steps: Take Control of Your 2025 SEP IRA Today
The SEP IRA is a simple, powerful tool for the self-employed and small business owners to make massive strides in their retirement savings. Remember the key numbers for 2025: a $70,000 limit and a final contribution deadline of October 15, 2026, if you file an extension.
The complexity lies in the details—the self-employed calculation and the strict employee rules. But now that you understand how to navigate them, you can use this account to its full potential. Your future self will thank you for acting now.
Confused about whether the SEP IRA or Solo 401(k) is right for your business? Download our free “SEP vs. Solo 401(k) Decision Guide,” a simple checklist to help you choose the perfect plan based on your income and goals.
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Note: The content provided in this article is for informational purposes only and should not be considered as financial or legal advice. Consult with a professional advisor or accountant for personalized guidance.
