How does a SEP-IRA work for self-employed individuals?

A SEP-IRA (Simplified Employee Pension Individual Retirement Account) is one of the easiest and most tax-efficient retirement accounts for self-employed individuals. **2025 Contribution Limits:** - Maximum contribution: 25% of net self-employment compensation (adjusted), OR $70,000 — whichever is less - Net SE compensation for this purpose = net Schedule C profit minus half of SE Tax - Example: Net profit $80,000. Half SE Tax: ~$5,652. Adjusted comp: $74,348. Max SEP contribution: $74,348 × 25% = $18,587. **Deadline to contribute:** - By your tax filing deadline including extensions — October 15 for most filers - This is unusually flexible — you can open and contribute to a SEP-IRA after year-end **Key benefits:** - Contributions reduce your AGI dollar-for-dollar - No annual filing requirement (unlike Solo 401k above $250k) - Easy to open at any major brokerage (Vanguard, Fidelity, Schwab) - Ideal for self-employed individuals with variable income **Key limitation:** - If you have employees, you must contribute the same percentage to their SEP-IRAs - No employee salary deferral component (unlike Solo 401k) - Cannot contribute more than 25% of adjusted net SE income

  • SEP-IRA 2025: up to 25% of net SE compensation, max $70,000
  • Contribution deadline: tax filing deadline including extensions (Oct 15)
  • Reduces AGI — saves income tax at your marginal rate
  • No annual filing requirement for balances under $250,000
  • Can open and fund after Dec 31 — up to filing deadline

Related Questions

  • What is a Solo 401(k) and how does it differ from a SEP-IRA?
  • What is Adjusted Gross Income (AGI) and why does it matter?
  • How do quarterly estimated taxes work for the self-employed?