My new name is Michelangelo, and I am now officially a Teenage Mutant Ninja Turtle after all of the $1.00 pizza slices I ate last Thursday at Stoners Pizza Joint in Pooler! I ate my pieces, and all the crust left from my wife’s slices (for some reason, she won’t eat her crust edges. I think that’s the best part!).
In the last issue, we started our multi-part series discussing retirement plan options for small business owners and introduced the different plans we will cover in each part. Today, we will look at the SEP IRA, which, abbreviated, stands for the Simplified Employee Pension Plan Individual Retirement Account.
What Is a SEP IRA?
The SEP IRA is ideal for small business owners and the self-employed.
A Simplified Employee Pension IRA (SEP IRA) is a retirement plan that lets a business owner make tax-deductible contributions directly into IRAs set up for themselves and any eligible employees. It’s one of the easiest retirement plans to open and maintain, with no annual filing requirement in most cases and very little ongoing administration.
Contributions are employer-only. Employees cannot defer their own salary into a SEP IRA. The business decides each year whether to contribute and how much, up to the legal limit, which gives owners flexibility in years when cash flow is tight. Traditional IRAs are set up for employees.
How It Works
- Employer contributions only: The business contributes up to 25% of each eligible employee’s compensation, capped at $72,000 for 2026.
- Same percentage for everyone: If you contribute 15% of your own compensation, you must contribute 15% of compensation for every eligible employee — you cannot favor yourself or key employees.
- Eligibility rules are set by the plan: You can generally require employees to be 21 or older and to have worked for you in at least 3 of the last 5 years, though you can choose less restrictive rules.
- Contributions are discretionary year to year: There’s no requirement to contribute every year, which suits businesses with variable income.
- Deadline flexibility: SEP contributions can be made up until your business tax filing deadline, including extensions.
2026 Contribution Limits
| Item | 2026 Limit |
|---|---|
| Maximum employer contribution | Lesser of 25% of compensation or $72,000 |
| Compensation cap used to calculate contributions | $360,000 |
| Employee salary deferrals | Not permitted — employer contributions only |
| Catch-up contributions | Not applicable (no employee deferral component) |
Benefits and Drawbacks
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Who a SEP IRA Fits Best
A SEP IRA tends to work well for solo entrepreneurs, freelancers, and small businesses with few or no employees, or with only employees who haven’t yet met eligibility requirements. It’s also a strong fit for owners with unpredictable income who want the option to contribute generously in good years without being locked into a fixed commitment.
It’s usually a weaker fit once a business has multiple long-term staff, since the requirement to contribute the same percentage for everyone can make the plan costly relative to a SIMPLE IRA or 401(k) that lets contribution formulas differ by role or tenure.
Next week, we are covering the SIMPLE IRA – a plan built for small businesses with employees who want to contribute their own money alongside an employer match.
(READING THIS SERIES: Each article that follows covers one plan in depth: how it works, exact 2026 contribution rules, a clear list of benefits and drawbacks, and the type of business it tends to fit best. Read the overview first, then jump to the plan, or plans, most relevant to your situation.)
If you have questions or would like to discuss any of this further, I would be glad to connect.
Don’t forget to join Live Like Locals and Kia Country of Savannah on September 10th from 5:30 – 7:30 pm for the September Local Social. I’ll see you there!
Thought for the Week:
“Too many people spend money they earned…to buy things they don’t want…to impress people that they don’t like.” – Will Rogers
(This article is intended for general educational purposes only and reflects tax rules for the 2026 tax year. Tax laws are subject to change. The IRS sets contribution limits, deduction rules, and eligibility requirements annually, and they can change. This content does not constitute personalized investment, tax, accounting, financial, or legal advice. Please consult a qualified financial advisor, tax professional, ERISA attorney, or retirement plan provider before making retirement planning decisions for your business.)
Frederick Hogsett, Jr., is a licensed financial coach with almost 30 years of experience helping individuals, families, small businesses, and nonprofit organizations. His office is located in the Savannah, Georgia, area and can be reached at (803) 463-2773 or by website at www.livemore.net/fhogsettjrclient.