S Corp SEP IRA Contribution Limits: W-2 Wages, Caps, and Deadlines

For 2026, an S Corporation can contribute up to 25% of an owner-employee’s W-2 wages to a SEP IRA, with a hard ceiling of $72,000 per participant.¹ The S Corp SEP IRA contribution limit runs entirely off W-2 salary. Pass-through profits reported on your Schedule K-1 do not count as earned income for the calculation, no matter how large.² That single rule drives everything else.

Why Only W-2 Wages Count

Sole proprietors calculate SEP contributions from net self-employment income. S Corp owner-employees don’t have that option. The IRS treats shareholder distributions as investment returns, not earned income, so they contribute nothing to the SEP base.²

This creates a tension unique to the S Corp structure. Many owners deliberately keep their W-2 salary modest and take the rest as distributions to reduce payroll taxes. That strategy works for FICA savings, but it directly shrinks your SEP ceiling. Pay yourself $80,000 in wages and your maximum contribution is $20,000. Set the same salary at $150,000 and the maximum jumps to $37,500. The salary figure you choose is, in effect, the dial that controls your retirement contribution capacity.

The IRS also requires S Corp owners to pay themselves reasonable compensation for the work they perform. An artificially low salary can trigger reclassification of distributions as wages. That risk exists on its own, but the SEP calculation gives you a second reason to think carefully about where the number lands.

Calculating the 2026 Maximum

Every contribution runs through a two-part test: the percentage limit and the dollar cap. Whichever is lower wins.

The 25% of Compensation Rule

The corporation contributes up to 25% of an employee’s W-2 compensation to that employee’s SEP IRA.¹ The employer makes the contribution. Employees, including the owner, cannot make their own salary deferrals into a SEP IRA.

Only the first $360,000 of W-2 wages counts in the 2026 calculation.³ An owner with $400,000 in W-2 pay still uses $360,000 in the math, producing $90,000 under the percentage test. That figure then meets the second limit.

The $72,000 Dollar Cap

Total employer contributions to any one participant cannot exceed $72,000 for 2026, matching the Section 415(c) annual addition limit.⁴ Here is how the two limits interact at different W-2 salary levels:

$100,000 salary: 25% = $25,000 maximum contribution.
$200,000 salary: 25% = $50,000 maximum contribution.
$288,000 salary: 25% = $72,000, exactly at the cap.
$300,000 salary: 25% = $75,000, cut back to the $72,000 cap.
$400,000 salary: 25% of the $360,000 compensation limit = $90,000, cut back to the $72,000 cap.

Reaching the full $72,000 contribution requires W-2 wages of at least $288,000.

The Uniform Percentage Trap

Whatever percentage the corporation contributes for the owner has to be the same percentage applied to every other eligible employee’s wages.⁵ Contribute 20% for yourself, and you contribute 20% for every qualifying worker.

This is what makes SEP IRAs expensive once an S Corp has staff. An owner who wants to put $50,000 into her own SEP on a $200,000 salary has committed the business to a 25% contribution rate for every eligible employee. Payroll costs scale directly with that decision.

An eligible employee is one who is at least 21, has worked for the business in at least three of the last five years, and received at least $800 in compensation for 2026.⁴ The plan may exclude employees covered by a collectively bargained retirement plan and nonresident aliens with no U.S.-source income.⁶ All contributions vest immediately.⁷

Contribution and Setup Deadlines

SEP contributions for a tax year can be made up to the due date of the S Corp’s return, including extensions.⁷ For a calendar-year filer, Form 1120-S is due March 15.⁸ A Form 7004 extension pushes that to September 15.⁹

You can also establish a brand-new SEP as late as the extended filing deadline for the tax year you want to cover.⁷ An S Corp with a profitable 2026 can set up and fund a SEP any time before September 15, 2027, provided the corporation filed for an extension. That retroactive flexibility is unusual among retirement plans.

Tax Treatment

The corporation deducts SEP contributions on Form 1120-S, Line 17, as a business expense.¹⁰ Traditional SEP contributions are not subject to federal income tax withholding, Social Security, Medicare, or federal unemployment taxes.⁷ Neither side pays FICA on the contribution, which makes each dollar cheaper than an equivalent raise. Withdrawals in retirement are taxed as ordinary income.

Since 2023, the SECURE 2.0 Act has allowed employers to designate SEP contributions as Roth. Those contributions escape FICA and FUTA, but the employee reports them as taxable income for the year they’re allocated, and the custodian issues Form 1099-R rather than Form 5498.¹¹ Qualified withdrawals then come out tax-free. Roth SEP contributions make sense for owners expecting higher rates in retirement or who want tax diversification, though the immediate tax bill can be steep at the $50,000-plus contribution levels S Corp owners often target.

When a Solo 401(k) Allows More

A SEP IRA only allows employer contributions of 25%. A Solo 401(k) allows employee deferrals (up to $23,500 for 2026 for those under 50) on top of employer contributions of up to 25% of wages, subject to the same $72,000 combined annual addition ceiling.⁴

At moderate salary levels the gap is large. On $100,000 in wages, a SEP maxes out at $25,000. A Solo 401(k) allows $23,500 in deferrals plus $25,000 in employer contributions, for $48,500. The advantage shrinks as compensation rises and disappears at roughly $288,000, where both plans hit $72,000. If the S Corp has no employees other than the owner and spouse, the Solo 401(k) almost always allows a larger contribution at the same salary. Once non-owner employees enter the picture, the SEP’s simplicity may outweigh the difference.

What Happens if You Overcontribute

Overshooting the limit triggers two separate penalties on two different parties.

The account holder owes a 6% excise tax on any excess sitting in the IRA, charged every year the money stays there.¹² To avoid it, the excess and any earnings on it must come out before the employee’s personal return due date, including extensions.¹³

The corporation faces its own 10% excise tax under Section 4972 on nondeductible contributions remaining in the plan at year end. Withdrawing the excess before the contribution deadline for that tax year avoids the tax.¹⁴ The employer reports it on Form 5330.¹⁵ Left uncorrected, the 6% tax compounds annually and can quickly outrun the original overcontribution. The IRS Voluntary Correction Program offers a way to fix an old excess without triggering an audit, for a fee scaled to plan assets.¹⁶

1
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)
2
Internal Revenue Service. Retirement Plan FAQs Regarding Contributions – S Corporation
3
Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
4
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
5
Internal Revenue Service. Contributions to Each Participant’s SEP-IRA Weren’t a Uniform Percentage of the Participant’s Compensation
6
Office of the Law Revision Counsel. 26 U.S. Code 408 – Individual Retirement Accounts
7
Internal Revenue Service. Simplified Employee Pension Plan (SEP)
8
Internal Revenue Service. Starting or Ending a Business 3
9
Internal Revenue Service. Instructions for Form 7004
10
Internal Revenue Service. 2025 Instructions for Form 1120-S – U.S. Income Tax Return for an S Corporation
11
Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
12
Internal Revenue Service. Retirement Topics – IRA Contribution Limits
13
Internal Revenue Service. Sample Article for Organizations and Employers to Use to Reach Customers
14
Office of the Law Revision Counsel. 26 U.S. Code 4972 – Tax on Nondeductible Contributions to Qualified Employer Plans
15
Internal Revenue Service. Instructions for Form 5330 (Rev. December 17, 2025)
16
Internal Revenue Service. SEP Plan Fix-It Guide – Contributions to the SEP-IRA Exceeded the Maximum Legal Limits