Operating a SEP


Generally, any employee who is at least age 21 and performed services for your business in three of the last five years is eligible to participant in the employer's SEP plan. Learn more.

What are the contribution rules?

Employer contributions for each eligible employee must be:

  • Based only on the first $290,000 of compensation for 2021 ($285,000 for 2020)
  • The same percentage of compensation for every employee
  • Limited annually to the smaller of $58,000 for 2021 ($57,000 for 2020) or 25% of compensation
  • Paid to the employee’s SEP-IRA

In plan operation, you must follow the definition of compensation stated in the document. Compensation generally includes the pay a participant received from you for personal services for a year.

Special computations for self-employed individuals. When figuring the contribution for your own SEP-IRA, compensation is your net earnings from self-employment, less the following deductions:

  • one-half of your self-employment tax and
  • contributions to your own SEP-IRA.

For more information on the deduction limitations for self-employed individuals, see Publication 560 PDF.

You do not have to contribute every year. When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, even employees who die or terminate employment before the contributions are made.

See the SEP Fix-It Guide for additional information on contribution rules and other information on avoiding common problems in operating a SEP.

When and where are contributions made?

Employer contributions must be made by the due date (including extensions) for filing your federal income tax return for the year.

You can deduct your contributions and your employees can exclude these contributions from their gross income. SEP contributions are not subject to federal income tax withholding, social security, Medicare and federal unemployment (FUTA) taxes.

After you send the SEP contributions to the financial institution you selected, that institution will manage the funds. Employees can move their SEP-IRA assets from one traditional IRA to another. SEP contributions can be put into stocks, mutual funds, money market funds, savings accounts and other similar types of investments. Each employee makes the investment decisions for his or her own account.

Who owns SEP contributions?

Contributions to SEP accounts are always 100 percent vested, or owned, by the employee.

What are the basic withdrawal rules?

SEP contributions and earnings are held in SEP-IRAs and can be withdrawn at any time, subject to the general limitations imposed on traditional IRAs. A withdrawal is taxable in the year received. If a participant makes a withdrawal before age 59½, generally a 10% additional tax applies. SEP contributions and earnings may be rolled over tax-free to other IRAs and retirement plans.

SEP contributions and earnings must eventually be distributed following the IRA required minimum distribution rules.

Participant loans are not permitted.


You may roll over PDF your SEP-IRA into most IRAs and qualified plans.

What are the filing and notice requirements?

Filing requirements: Generally, the employer has no filing requirements, including the Form 5500 return.

Do not include SEP contributions on employees’ Form W-2 PDF, but check the "Retirement Plan" box in box 13. For more information, see the instructions PDF for Forms W-2 and W-3.

Notice requirements: Employers must provide employees:

  • a copy of Form 5305-SEP PDF (or the prototype document) and the other documents and disclosures listed in its instructions.
  • notice of any amendments to the SEP and the requirements for receiving contributions.
  • an annual contribution statement.

How can I tell if my plan is operating within the rules?

You should conduct an annual check-up to help determine whether your SEP plan is operating within the rules. Checklists and tips are available to help with periodic reviews of your plan.

What are the consequences of making a mistake in operating my plan?

Generally, if the SEP fails to satisfy its legal requirements, tax benefits can be lost. However, any error can likely be corrected by using one of the IRS correction programs.

Additional resources