SEP IRA
Quick Definition
A Simplified Employee Pension IRA that lets self-employed individuals contribute up to 25% of net self-employment earnings (max $69,000 in 2024) to a tax-deferred retirement account with minimal paperwork.
What Is SEP IRA?
A SEP IRA (Simplified Employee Pension Individual Retirement Account) is one of the easiest retirement plans for self-employed contractors to set up and maintain. You open a SEP IRA at any brokerage (Fidelity, Schwab, Vanguard, etc.), fill out a one-page form (IRS Form 5305-SEP), and start contributing. There's no annual filing requirement with the IRS (unlike a Solo 401(k) that requires Form 5500-EZ once assets exceed $250,000).
Contributions are made solely by the employer (you, in this case) — there's no employee deferral component like a 401(k). You can contribute up to 25% of your net self-employment earnings (after deducting half of your self-employment tax), with a maximum of $69,000 in 2024. Contributions are tax-deductible, meaning they reduce your taxable income in the year you make them.
One of the biggest advantages of a SEP IRA is flexibility. Contributions are completely discretionary — you can contribute the maximum in a profitable year and nothing in a lean year. There's no commitment to contribute every year. You also have until your tax filing deadline (including extensions) to make contributions for the prior year. Had a great 2024? You can open a SEP IRA and fund it for 2024 all the way until October 2025 if you file an extension.
The main limitation: SEP IRAs only allow traditional (pre-tax) contributions — no Roth option. And if you have employees, you must contribute the same percentage for them as you do for yourself, which can get expensive.
Why It Matters for Contractors
For solo contractors who want dead-simple retirement savings with high contribution limits, the SEP IRA is hard to beat. No complex plan documents, no annual filings, flexible contributions, and you can open one and fund it retroactively at tax time.
However, if you're earning under roughly $230,000 and want to maximize retirement savings, the Solo 401(k) usually wins because of the employee deferral component. The SEP IRA's 25% employer-only contribution means you need higher income before the numbers match a Solo 401(k). At $100,000 net earnings, a SEP maxes out around $18,600, while a Solo 401(k) can hit $41,000+.
Example
You're a landscaping contractor who had a great year — $200,000 in net self-employment income. After deducting half your SE tax ($14,130), your compensation for SEP purposes is $185,870. Your maximum SEP contribution: 25% × $185,870 = $46,468. You contribute the full amount, reducing your taxable income by $46,468. At the 24% federal bracket, that saves you $11,152 in federal taxes. Next year is slower — you earn $80,000 net and decide to contribute only $10,000. No penalties, no problem. The flexibility is built in.
Key Takeaways
- ✅ SEP IRA allows up to 25% of net self-employment earnings, max $69,000 in 2024
- ✅ Dead simple to set up — one-page form, no annual IRS filings
- ✅ Contributions are flexible and discretionary — contribute more in good years, less in lean years
- ✅ No Roth option and must cover eligible employees at the same percentage — consider Solo 401(k) if these matter
How Holdings Helps
Holdings tracks your net earnings throughout the year, making it easy to plan your SEP IRA contributions and maximize your tax savings.
Related Terms
Solo 401(k)
A retirement plan designed for self-employed individuals with no full-time employees, allowing you to contribute as both the employer and employee for significantly higher annual limits than a traditional IRA.
Self-Employment Tax
A 15.3% tax that self-employed individuals pay to cover Social Security (12.4%) and Medicare (2.9%) — essentially both the employer and employee halves of payroll tax.
Schedule C
The IRS form (Schedule C, Profit or Loss from Business) that sole proprietors and single-member LLCs use to report business income and expenses on their personal tax return.
Net Income vs Gross Income
Gross income is the total money your contracting business brings in before any expenses, while net income is what's left after you subtract all business costs — and it's what you actually pay taxes on.
Quarterly Estimated Taxes
Payments you make to the IRS four times a year to cover your income tax and self-employment tax, since no employer is withholding taxes from your contractor paychecks.
Solo 401(k)
A retirement plan designed for self-employed individuals with no full-time employees, allowing you to contribute as both the employer and employee for significantly higher annual limits than a traditional IRA.
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