S Corp SEP IRA: Contribution Limits, Deadlines, and Roth Option

An S Corp SEP IRA is a simplified employee pension plan that the corporation adopts through a written agreement, funds with employer-only contributions tied to each participant’s W-2 wages, and deducts on Form 1120-S. For 2026, the corporation can contribute up to 25% of an eligible employee’s W-2 compensation or $72,000, whichever is less.¹ The plan can be set up and funded as late as the S Corporation’s tax filing deadline, including extensions, for the year the contribution applies to.²

W-2 Wages Are the Only Number That Matters

Sole proprietors and partners calculate SEP contributions from net self-employment income. An S Corporation works differently. The shareholder-employee is paid through payroll, and only the W-2 salary counts toward the SEP contribution. Distributions, dividends, and other payments to shareholders are ignored.³

That creates a real tension with the reasonable compensation rule. The IRS requires S Corp officers who perform more than minor services to take reasonable W-2 wages before pulling distributions.⁴ Owners who keep their salary low to save payroll tax also shrink the base their SEP contribution is calculated from. There is no shortcut; the wages have to be defensible if the IRS looks, and whatever you set is what drives your retirement contribution.

One thing to clear up: some sources say S Corp owner-employees are subject to a reduced 20% effective SEP rate. That reduction is a self-employed calculation, used by sole proprietors and partners because the deduction has to be netted against their own earned income. Shareholder-employees are W-2 employees. The full 25% rate applies straight to wages.⁵

How Much the Corporation Can Contribute for 2026

The maximum SEP contribution for any participant is the lesser of 25% of W-2 compensation or $72,000 for 2026.¹ The 25% is applied to compensation up to the 2026 cap of $360,000; wages above that are disregarded.⁶ An owner-employee paid $400,000 in W-2 wages would have the contribution calculated on the first $360,000, so the dollar cap of $72,000 governs (25% of $360,000 is $90,000).

The corporation picks a single contribution percentage between 0% and 25%, and that same percentage has to be applied to every eligible employee’s compensation.³ The rate can change year to year, and you can skip contributions in lean years. But in a year you contribute, everyone gets the same percentage.

A quick worked example for a 2026 plan with two participants at a 15% rate:

Owner-employee: $200,000 W-2 wages × 15% = $30,000
Staff employee: $55,000 W-2 wages × 15% = $8,250
Total the corporation contributes and deducts: $38,250

The corporation deducts both amounts as a business expense on Form 1120-S, which reduces the ordinary income flowing through to shareholders on Schedule K-1.⁷ The contribution does not show up on anyone’s W-2, and it is 100% vested immediately, so an employee who quits the next week keeps every dollar.⁸

Which Employees You Have to Cover

SEP plans have mandatory coverage rules. Every employee meeting all three of these has to be included:

Age 21 or older
Worked for the business in at least three of the last five years
Received at least $800 in compensation during 2026⁶

The $800 threshold is indexed for inflation. Your plan can be more generous (for example, including employees after one year), but it cannot be more restrictive than the statutory rule.²

Skipping an eligible employee is one of the most common SEP failures, and it does not just affect the person left out. It can put the plan’s tax-advantaged status at risk for everyone in it, including the owner. Run through the payroll records each year before funding contributions.

Adopting the Plan and the Funding Deadline

Setting up the plan legally requires a written agreement. The simplest route is IRS Form 5305-SEP; you complete it, keep it with your corporate records, and do not file it with the IRS.⁹ Banks and brokerages also offer prototype SEP documents that do the same job.

Form 5305-SEP cannot be used if the S Corporation maintains any other qualified retirement plan, if the plan year is not the calendar year, or if the contribution formula is integrated with Social Security.⁸ Any of those situations means using a prototype or individually designed document instead.²

Both plan adoption and contribution funding share the same deadline: the due date of the S Corporation’s income tax return, including extensions.² For a calendar-year filer, that means March 15, or September 15 with an extension.¹⁰ An S Corp that wants a 2025 SEP deduction has until September 15, 2026 to adopt the plan and get the money in. That flexibility is one of the SEP’s biggest practical advantages: you can look at actual results before committing.

Each eligible employee needs their own SEP IRA account at a financial institution. The employer picks where to establish accounts, but the accounts belong to the employees, who can later move the funds to another custodian.

The Roth SEP Option

Under the SECURE 2.0 Act, for tax years beginning after December 31, 2022, employers can offer employees the choice of receiving SEP contributions into a Roth IRA instead of a traditional SEP IRA.¹¹ It is not automatic; the employee has to affirmatively elect the Roth treatment.

The employer still gets the deduction, but the employee owes income tax on the contributed amount in the year it goes in. In return, qualified withdrawals come out tax-free later. The contribution is reported on Form 1099-R for the year it is made and is not subject to income tax withholding, FICA, or FUTA; the employee handles the tax on their personal return.¹²

Fixing an Excess Contribution

Contributions above the legal limit face a 6% excise tax each year the excess sits in the account.² The employee can avoid the tax by withdrawing the excess plus any earnings before the due date of their personal tax return, including extensions. The earnings withdrawn are taxable income for that year.

On the plan side, the IRS runs two correction routes. The Self-Correction Program lets the corporation fix insignificant failures on its own if it had reasonable procedures in place. Larger or more complicated problems go through the Voluntary Correction Program, which is a formal IRS submission.¹³ Under both, the standard fix is distributing the excess (adjusted for earnings) back to the employer.

Withdrawals and the Prohibited Transaction Trap

SEP IRA distributions follow traditional IRA rules. Withdrawals are taxable as ordinary income, and amounts taken before age 59½ generally trigger a 10% early withdrawal penalty on top of the income tax, with exceptions for disability, certain medical expenses, and substantially equal periodic payments.¹⁴

Shareholder-employees have to be careful about prohibited transactions. The IRS bars certain dealings between an IRA and “disqualified persons,” a group that includes the account owner, their spouse, lineal ancestors and descendants, and entities they control. Selling property to the IRA, borrowing from it, using its assets for personal benefit, or paying yourself from an IRA-owned entity are all off limits.¹⁵

The penalty for a prohibited transaction in an IRA is much harsher than in a 401(k). The account loses its tax-exempt status. The IRS treats the entire balance as distributed on the first day of the year the transaction happened, triggering income tax on the whole thing plus, potentially, the 10% early withdrawal penalty.¹⁶ Keep the business and the SEP IRA completely separate.

When a Solo 401(k) Beats a SEP

A SEP is not always the best fit. If the S Corporation has no employees other than the owner (and possibly a spouse), a solo 401(k) usually allows larger total contributions at moderate salary levels. The reason is structural. A SEP allows only employer contributions of up to 25% of W-2 wages. A solo 401(k) allows employee deferrals of up to $24,500 for 2026 ($32,500 if age 50 or older) on top of employer contributions of up to 25% of W-2 wages.⁶

The gap is largest in the middle. An owner earning $100,000 in W-2 wages caps out at $25,000 through a SEP (25% of $100,000). With a solo 401(k), the same owner could put in $24,500 as an employee deferral plus $25,000 as an employer contribution, for a total of $49,500. At $300,000 or more in wages, both plans converge on the $72,000 ceiling.

The trade-off is paperwork. A solo 401(k) needs its own plan document, may require a Form 5500-EZ once assets exceed $250,000, and loses its simplified status the moment a non-spouse employee is hired. A SEP scales cleanly as headcount grows and involves almost no annual filing. And using Form 5305-SEP rules out running a solo 401(k) or any other qualified plan alongside it.² If hiring is on the horizon, or minimal administration matters more than squeezing the last dollar of contribution room, the SEP still wins.

1
Internal Revenue Service. SEP Contribution Limits
2
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
3
U.S. Department of Labor. SEP Retirement Plans For Small Businesses
4
Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers
5
Internal Revenue Service. Calculating Your Own Retirement Plan Contribution and Deduction
6
Internal Revenue Service. Notice 2025-67 – 2026 Amounts Relating to Retirement Plans and IRAs
7
Internal Revenue Service. About Form 1120-S, U.S. Income Tax Return for an S Corporation
8
Internal Revenue Service. Simplified Employee Pension Plan SEP
9
Internal Revenue Service. Form 5305-SEP Simplified Employee Pension Individual Retirement Accounts Contribution Agreement
10
Internal Revenue Service. Starting or Ending a Business
11
Internal Revenue Service. SECURE 2.0 Act Impacts How Businesses Complete Forms W-2
12
Internal Revenue Service. Notice 2024-02 – Miscellaneous Changes Under the SECURE 2.0 Act of 2022
13
Internal Revenue Service. SEP Plan Fix-It Guide – Contributions to the SEP-IRA Exceeded the Maximum Legal Limits
14
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
15
Internal Revenue Service. Retirement Topics – Tax on Prohibited Transactions
16
Office of the Law Revision Counsel. 26 U.S. Code 4975 – Tax on Prohibited Transactions