Guide to SEP IRA Contribution Limits

Key facts

  • SEP IRA contributions and earnings are tax-deferred.
  • All contributions to SEP IRA accounts are made by the employer.
  • There are rules around contribution limits to SEP IRAs.

Business owners know that saving for retirement is important, both for their own financial futures and for their employees. However, the expense and complexity of large plans can be out of reach for small- and medium-sized employers. Fortunately, IRS regulations support a variety of programs that make it easy for smaller companies and individuals who are self-employed to contribute to retirement savings accounts.

The Simplified Employee Pension Individual Retirement Account (SEP IRA) is designed to be user-friendly, adopting many of the features and benefits of a Traditional IRA. Contributions and earnings are tax-deferred up to the contribution limits, and funds can be withdrawn by the account owner at any time. The primary differences between a Traditional IRA and a SEP IRA is that SEP IRA is opened by employers on behalf of their employees, and all contributions are made by employers.

SEP IRA Eligibility

Any business owner can create a SEP IRA for staff members using forms provided by the IRS. Once in place, employers communicate the plan details to eligible employees, then an individual account is opened for each participant. Eligible employees include those who meet the following criteria:

  • Age 21 or older
  • Worked for the sponsoring employer for three out of the previous five years
  • Received $650 or more in income during the plan year from the sponsoring employer

Minimum income amounts are reviewed annually to ensure they remain current with cost-of-living increases.

SEP IRA Contribution Limits

As with other qualified retirement plans, there is an annual limit on the amount that can be contributed to each employee’s SEP IRA account. In 2022, employers can contribute a maximum of 25% of each accountholder’s annual pay or $61,000, whichever is less. Note that the SEP IRA does not provide for catch-up contributions.

When determining the contribution amount, only the first $305,000 of each employee’s salary can be considered. For example, an employer that chooses to contribute 5% of employees’ pay to their SEP IRA accounts would deposit $5,000 for an individual with an annual salary of $100,000. This calculation changes for an individual receiving an annual salary of $315,000. Instead of an employer contribution of 5% ($15,750), the contribution is $15,250, which is 5% of $305,000.

Like the minimum income requirement, contribution limits and maximum compensation amounts are reviewed annually and adjusted when necessary, based on cost-of-living increases.

2022 2021 2020
SEP Minimum Compensation $650 $650 $600
SEP Maximum Contribution $61,000 $58,000 $57,000
SEP Maximum Compensation $305,000 $290,000 $285,000

Avoiding SEP IRA Pitfalls

When contributing to employees’ SEP IRA accounts, there are two pitfalls to avoid. First, employers are not required to contribute to SEP IRA accounts every year. However, if a contribution is made to the account of any eligible employee, employers must contribute to all eligible employee accounts. Second, despite the fact that employees over the age of 72 must take required minimum distributions from their SEP IRAs, employers must continue to contribute to their accounts if all eligibility criteria is met.


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