Contribution Limits for SEP IRAs 2021

Learn about employer to employee, self-employed, and other contribution types

Contribution limits for SEP IRAs depend on if the contributions are going from an employer to an employee or if the contributions are going to the business owner.

Also, while SEP contributions are made by the employer/business owner only, there is the possibility for employees and business owners alike to make traditional IRA contributions to their SEP IRAs. Each of these contribution types will be discussed in this article.

If you’d like to skip directly to a specific contribution type, then you may do so by clicking one of the following:

If you are new to SEPs, then you may want to start with the quick SEP overview next.

SEP Overview

A SEP (Simplified Employee Pension) is a plan that provides business owners with a simplified means to contribute to both their own and employees’ retirement plan.

When a SEP plan is organized, some documents around how the SEP plan will be structured (eligibility rules, contribution rate, and so) on will be laid out. Along with this, a SEP IRA will be created for each employee as well as the business owner, which is where the contributions from the SEP plan will be deposited to.

The SEP-IRA that is created for the SEP plan is a traditional IRA and follows the same rules as a traditional IRA does like rollover and distribution rules. It’s only the SEP contributions that really make the account unique.

With a SEP, only the employer/business owner can make SEP contributions. Employees are not allowed to make SEP contributions. The amount that is contributed is a certain rate, which is the same between the business owner and employee, of the given individual’s compensation. While the compensation rate is the same, there are some different contribution rules for the employer/self-employed vs the employees. These different rules will be discussed throughout the rest of this article starting with employer contributions to employees.

Employer Contributions to Employee

Employer contributions to an employee’s SEP-IRA are limited to the lesser of the following amounts:

  • 25% of the employee’s compensation where only the first $290,000 in compensation can be included.
  • $58,000.

An employee’s compensation amount included in the calculated SEP contribution includes:

  • Wages, tips, and other employer compensation subject to income tax withholding from section 3401(a).
  • Compensation deferred from a 457 plan.
  • Internal Revenue Code Section 6051(a)(8) amounts including elective contributions made under a Simple IRA.

The SEP contribution rate is applied to the compensation amount to get the SEP contribution amount. For example, if an employee’s compensation amount is $60,000 and the SEP contribution rate is 3%, then the contribution amount the employer will make to the employee’s SEP IRA is $1,800 ($60,000 * 0.03).

As another example, say that an employee’s compensation is $400,000. Since the compensation that can be included for SEP contributions is capped at $290,000, the compensation amount that can be used in this scenario is $290,000. Now, let’s say that the employer is very generous and the contribution rate is 21%. 21% of $290,000 is $60,900. This is over the $58,000 contribution amount cap meaning that the contribution amount will end up being $58,000.

Contributions to Business Owner

Business owner/self-employed contributions to an SEP-IRA are limited to the lesser of the following amounts:

  • 25% of compensation where only the first $290,000 in compensation can be included.
  • $58,000.

If you read the employer contributions to employee section, then you may have noticed that the contribution amounts between the two are the same. This is true. But, the compensation amount that can be used is calculated differently.

To determine the compensation amount, take your net self-employment earnings and subtract the following:

  • One half of your self-employment tax.
  • Contributions to your own (not your employees’) SEP-IRA.

The question you probably have right now is, how can I know what my compensation amount should be if the compensation amount requires me to know what the SEP contribution is but the SEP contribution requires me to know what the compensation amount is? Yes, this is a bit confusing as it’s a circular situation. Fortunately, there is a calculation we can use to determine the compensation amount in this scenario.

The first step to determine the contribution amount is to determine the reduced contribution rate. To do so:

  1. Take the plan’s contribution rate as a decimal and add 1 to it (e.g., 0.01 + 1 = 1.01 for a 1% contribution rate).
  2. Divide the contribution rate by the number above (e.g., .01/1.01 = 0.00990 for a 1% contribution rate). This amount is the reduced contribution rate.

We’ll take the reduced contribution rate that was just calculated and apply it to the schedule C net profit minus ½ self- employment tax deduction to get the max SEP contribution amount.

Let’s run through an example. Say that the schedule C net profit is $60,000, the self-employment tax on this amount is $10,000, and the contribution rate is 3%. Using these numbers:

  1. Reduced contribution rate is 0.03 / (1 + 0.03) = 0.029126.
  2. Net profit reduced by ½ SE tax is $60,000 - ($10,000 / 2) = $55,000.
  3. The contribution amount is 2.9126% (reduced contribution rate) of the reduced net profit just calculated, which is 0.029126 * $55,000 = $1,601.94

You can double check that the amount just calculated is correct by applying the full contribution amount to the allowed compensation amount, which uses the number just calculated. That is:

  1. Net profit reduced by ½ SE tax is $60,000 - ($10,000 / 2) = $55,000.
  2. The above amount reduced by the SEP contribution is $55,000 - $1,601.94 = $53,398.06
  3. 3% of this amount is 0.03 * $53,398.06 = $1,601.94

As you can see, the second calculation works out to the same amount as the first verifying that the first calculation’s amount is correct.

Employee and Business Owner Traditional IRA Contributions

As mentioned earlier, only the employer or business owner can make SEP contributions. That said, since the SEP IRA account is just a traditional IRA account that is used to hold the SEP contributions, you may be able to make traditional IRA contributions to this account.

To be clear, traditional IRA contributions are fully distinct from SEP contributions and follow all the rules of a traditional IRA. This means that you are limited to $6,000 ($7,000 if age 50 or older) in 2021. And, these contributions go against your annual maximum individual contribution amount to all IRAs (Roth, traditional, and SEP) for the year.

Why would one want to make individual contributions to a SEP IRA account? There is no real reason to do so other than the potential convenience over opening up another traditional IRA account for individual contributions.

It’s important to note along with this that if you’re looking to make after-tax contributions, then you should open up a separate Roth IRA. After-tax contributions can be made to a traditional IRA but it’s much simpler to manage in a separate Roth IRA and a Roth IRA has a number of other advantages that a traditional IRA does not in the context of after-tax contributions.


The discussion about SEP contribution limits wouldn’t be complete without briefly touching on a SARSEP. A SARSEP is a type of SEP that follows the previous contribution rules that have been discussed but that additionally allows individual elective contributions. If you’re considering creating a new SEP, then you’re not going to be able to use a SARSEP as new SARSEP accounts haven’t been allowed to be created since before 1997. But, SARSEP accounts created before 1997 have been grandfathered in.

For a SARSEP, a participant can make elective contributions up to the lesser of $19,500 or 25% of their compensation. The overall contribution limit of the employer and employee still can’t be over the previously defined SEP limits.

It’s unlikely that you’ll end up ever using a SARSEP given that new plans haven't been allowed to be created for over 20 years. But, if you’d like the dive into the specifics a bit more, then see [3].


  1. IRS - Faqs Regarding SEPs
  2. IRS - p560
  3. IRS - SARSEP Contribution Limits