The easiest $70K shelter
in the tax code.
A SEP-IRA is the fastest retirement plan a self-employed person can open — one form, one page, no annual filings — and it shelters up to 25% of compensation, capped at $69,000 in 2024 and $70,000 in 2025.
The 60-second pitch
A Simplified Employee Pension (SEP) IRA is exactly what its name promises — the IRS-blessed easy button for self-employed retirement. You contribute up to 25% of your compensation (20% of net self-employment income after the deductible half of SE tax for sole props), capped at $69,000 in 2024 and $70,000 in 2025.
Every dollar contributed is deducted on your tax return (Schedule 1, line 16 for sole props; Form 1120-S for S-corps). The money grows tax-deferred. You only pay tax decades later when you pull it in retirement, presumably at a lower rate.
Best part: you can set it up and fund it as late as your tax-return deadline plus extensions — so you can decide in October whether to take the deduction for last year. No other retirement plan offers that flexibility.
The $14,800 paper-easy deduction
Mike runs a single-member LLC software consultancy. 2024 net SE income: $200,000. After the deductible-half-of-SE-tax adjustment, his "compensation" for SEP purposes is roughly $186,000. He contributes 20% of net SE income (the math is 25% of "net comp" which equals 20% of pre-adjustment for sole props).
| Net SE income (Schedule C) | $200,000 |
| Deductible half SE tax adjustment | −$14,130 |
| "Net earnings from self-employment" | $185,870 |
| SEP contribution (20%) | $37,174 |
| Federal tax saved (32% bracket + 3.8% NIIT-adj) | $11,896 |
| PA state tax saved (3.07%) | $1,141 |
| QBI deduction preserved/restored | $1,763 |
The step-by-step checklist
- Open the SEP-IRA at any custodian. Fidelity, Schwab, Vanguard, ETrade — all offer SEP-IRAs free of charge. Most allow online setup in under 10 minutes.
- Adopt a SEP plan using Form 5305-SEP. One page. You keep it in your records — do not file it with the IRS. The custodian will provide their version if you don't bring your own.
- Calculate your contribution. Sole prop / single-member LLC:
20% × (net SE income − ½ SE tax). S-corp owner:25% × W-2 wages. Use the IRS Rate Worksheet for Self-Employed (Pub 560). - Stay under the dollar cap. $69,000 for 2024, $70,000 for 2025. Don't include earnings above the comp cap ($345,000 in 2024 / $350,000 in 2025).
- Fund by your tax-return deadline (plus extensions). For a 2024 contribution: April 15, 2025 — or October 15, 2025 if you file Form 4868 extension. This is unique to SEP-IRAs.
- Deduct on the right line. Sole prop: Schedule 1, line 16 ("Self-employed SEP, SIMPLE, and qualified plans"). S-corp: 1120-S deducts employer contributions on the corporate return.
- If you have employees, you must contribute the same percentage of comp for every eligible employee (anyone 21+, worked 3 of the last 5 years, earned $750+/yr). That's the catch — SEPs are not "selective."
- Track basis if you also have a SEP-IRA + non-deductible IRA contributions. Form 8606 every year to avoid double-taxation at withdrawal.
The law — cite this in your file
- IRC §408(k) Simplified Employee Pension. Defines SEP arrangement, eligibility, contribution limits. Employer contributions are not in the employee's income at the time made (§402(h)).
- IRC §415(c) Defined-contribution annual additions limit. $69,000 for 2024 and $70,000 for 2025 — the absolute cap on combined SEP + Solo 401(k) employer contributions.
- IRC §401(a)(17) Compensation cap. $345,000 in 2024; $350,000 in 2025. Earnings above this don't count for SEP contribution calculations.
- IRC §404(h) Deduction limit. Employer SEP contributions deductible up to 25% of aggregate compensation.
- IRS Form 5305-SEP Model adoption agreement. Self-prepared, kept in records — NOT filed with IRS.
- Notice 2024-80 2025 retirement plan limits. Confirms the $70,000 §415(c) cap and $350,000 §401(a)(17) compensation cap for 2025.
- IRS Pub 560 Retirement Plans for Small Business. Includes the SEP contribution rate worksheet — read this before computing your number.
Audit risk flags
- Over-contribution. Excess contributions hit a 10% excise tax (Form 5330) if not corrected by year-end. Run the rate worksheet, don't eyeball it.
- Forgetting eligible employees. The SEP "pro-rata" rule means every eligible employee gets the same % contribution. Skipping one is plan disqualification.
- Using "compensation" wrong for sole props. Self-employed compensation = net SE income − ½ SE tax − SEP contribution itself (the circular calc). Use the IRS worksheet or your software's calculator.
- Funding after the deadline. Tax return + extension is the cutoff. After that, the contribution is disallowed and may need to be withdrawn with earnings.
- Treating it as a Roth. SEP contributions are traditional only — pre-tax in, taxable out. SECURE 2.0 (2022) allows Roth SEP-IRAs, but most custodians have not yet built the systems for it. Default is traditional.
- Comp cap violation. Don't compute contributions on compensation above $345K (2024) / $350K (2025). Earnings above the cap are zero for SEP purposes.
When not to choose SEP-IRA
- You have employees you don't want to contribute for. SEP requires equal % for every eligible employee. If you have a part-time admin and want to skip her, use a Solo 401(k) (no employees) or a Safe Harbor 401(k) (selective).
- You want to do a catch-up contribution at 50+. SEPs don't have a separate $7,500 catch-up. Solo 401(k) does. If you're 50+, a Solo 401(k) generally wins.
- You want Roth contributions. Most SEP custodians don't offer Roth. Solo 401(k) Roth is widely available.
- You want to borrow against the balance. SEP-IRAs don't allow plan loans. Solo 401(k)s do (up to 50% of vested balance, $50K max).
- You're a high earner under 50 maxing out anyway. Solo 401(k) gives the same $70K ceiling but reaches it with less compensation thanks to the $23,500 employee deferral.
- You'll want to backdoor-Roth your IRA. Existing SEP-IRA balances trigger the pro-rata rule on backdoor Roth conversions. A Solo 401(k) (which is a 401, not an IRA) sidesteps this.
PilePilot logs your SEP on the right Schedule C line.
The Books agent identifies your SEP-IRA transfer, calculates the deduction, and stores the Form 5305-SEP in the Vault. Schedule 1 line 16 (sole prop) or 1120-S line 17 (S-corp), one click.
Start free →Built for real small businesses. Schedule C + 1120-S ready.