Compute your maximum SEP IRA contribution as a self-employed sole proprietor. Up to 20% of adjusted net SE earnings, capped at $72,000 in 2026.
Maximum SEP IRA contribution
—
Federal tax savings
—
2026 IRS hard cap
$72,000
Your breakdown
Updates live as you type| Step | Amount |
|---|
Why a sole proprietor's rate is 20, not 25
A SEP IRA is the simplest serious retirement account a self-employed person can open. The headline rule is up to 25 percent of compensation, but the reduced contribution rate for a sole proprietor is generally 20 percent after the half-SE-tax adjustment. This tool runs that calculation and caps the result at the 2026 IRS limit of $72,000.
Sheltering $27,881 on $150,000 of profit
Walk through the defaults: $150,000 of net self-employment income at a 32 percent marginal rate. First, self-employment tax is $150,000 times 0.9235 times 0.153, which is $21,194; half of that, $10,597, is deductible and comes off the base. That leaves $139,403 of adjusted net earnings. Multiply by 20 percent and the maximum SEP contribution is $27,881, comfortably under the $72,000 ceiling. At a 32 percent marginal rate, contributing the full amount cuts your federal income tax by about $8,922.
The half-SE-tax step that lowers your base
That deduction for half of self-employment tax is not a quirk; it is the code treating you fairly. A regular employee splits Social Security and Medicare taxes with an employer, who pays half and deducts it as a business expense. A self-employed person pays both halves, so the law lets you deduct the employer-equivalent half as an adjustment to income. The SEP calculation respects that by computing your contribution base on earnings after that deduction. Skip the step and you would overstate both your contribution room and your deduction, which is a common error in back-of-envelope estimates.
SEP, Solo 401(k), and the same hard cap
Where a SEP stops being optimal is at moderate incomes. Because a SEP gives only the employer-style contribution, a sole proprietor often shelters more in a Solo 401(k), which adds an employee deferral. The SEP catches up only at high income, where both plans bump against the same $72,000 limit before catch-up and the simplicity of the SEP can win. The deadline and contribution mechanics are spelled out in IRS Publication 560.
Can I still contribute to a personal IRA if I have a SEP?
Yes. A SEP IRA is funded by the business and is separate from your personal traditional or Roth IRA, so you can contribute to both in the same year up to each one's own limit. Whether your personal traditional IRA contribution is deductible may be limited, however, because being covered by a SEP counts as being an active participant in a workplace plan for the IRA deduction phase-out.
What if my income varies wildly from year to year?
A SEP is well suited to lumpy income because the contribution is discretionary; there is no required annual amount. In a strong year you can fund the full 20 percent, and in a lean year you can contribute little or nothing without penalty. That flexibility is one reason freelancers and seasonal businesses favor it over plans with fixed funding commitments.