A SEP IRA for 1099 contractors takes about half an hour to open and lets you shelter up to $72,000 of 2026 self-employment income from tax. You adopt a one-page IRS plan document, open the account at any brokerage or bank, and fund it anytime up until your tax filing deadline, including extensions.1Internal Revenue Service. Simplified Employee Pension Plan (SEP) No annual filings, no payroll setup, no employer paperwork beyond the initial form.
You qualify if you have net earnings from self-employment: sole proprietors, single-member LLC owners, partners, and anyone receiving a 1099-NEC or 1099-MISC for contract work. In SEP terms, your business is the “employer” and you are the “employee.” If your business had no net profit for the year, you cannot contribute for that year.
Setting Up the Account
There are two steps: adopt a written plan, then open the account.
Most brokerages and banks use IRS Form 5305-SEP, a one-page standardized agreement that spells out the plan terms. You fill it out, sign it, and keep it with your business records. You do not file it with the IRS.2Internal Revenue Service. Form 5305-SEP (Rev. 12-2004) The institution then opens a SEP IRA account in your name and you can start depositing.
You can establish the plan for a given tax year as late as the due date of your income tax return, including extensions.1Internal Revenue Service. Simplified Employee Pension Plan (SEP) A 2026 plan can be set up as late as October 15, 2027 with a valid extension, and contributions follow the same deadline. That means you can close out the year, calculate your exact net earnings, and then decide how much to contribute.
How Much You Can Contribute
For 2026, the ceiling is the lesser of 25% of compensation or $72,000, with compensation counted only up to $360,000.3Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)4Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living But if you’re self-employed rather than a W-2 employee, the effective rate lands at 20%, not 25%.
Why 20 Percent, Not 25
When you are both the employer and the employee, the contribution itself reduces the compensation base it’s calculated on. That creates a circular calculation, which the IRS resolves by requiring a reduced rate. At a 25% plan rate, the reduced rate is 25% ÷ 125% = 20%.5Internal Revenue Service. Calculating Your Own Retirement Plan Contribution and Deduction
You also subtract half your self-employment tax before applying that rate. The full sequence:
- Start with your Schedule C net profit (gross income minus business expenses).
- Calculate self-employment tax: net profit × 92.35% × 15.3% (12.4% Social Security plus 2.9% Medicare).
- Subtract half of that SE tax from your net profit. The result is your adjusted net earnings.
- Multiply adjusted net earnings by 20%. That’s your maximum SEP contribution.
A Worked Example
Say your Schedule C shows $100,000 in net profit. Self-employment tax runs roughly $14,130 ($100,000 × 92.35% × 15.3%). Half of that is about $7,065. Subtracted from $100,000, adjusted net earnings come to $92,935. Multiply by 20% and your maximum SEP contribution is $18,587.
IRS Publication 560 has a Rate Table and Deduction Worksheet built for this calculation.6Internal Revenue Service. Publication 560 – Retirement Plans for Small Business Most tax software runs it automatically. Run it once by hand so you know where the number comes from. Getting it wrong creates an excess contribution, which triggers a 6% excise tax for every year the excess sits in the account.7Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
Your Personal IRA Limit Is Separate
The SEP contribution is an employer contribution and does not count against the limit for a personal traditional or Roth IRA. For 2026 you can still put in up to $7,500 to a traditional or Roth IRA ($8,600 if you’re 50 or older) on top of the SEP, subject to the normal income eligibility rules for those accounts.8Internal Revenue Service. Retirement Topics – IRA Contribution Limits
How the Tax Break Works
SEP contributions come off “above the line” on your Form 1040, reducing your adjusted gross income directly. You don’t need to itemize. A lower AGI can also help you qualify for other benefits that phase out at higher income levels.
Inside the account, investments grow tax-deferred: no tax on dividends, interest, or capital gains until you withdraw. Every dollar comes out in retirement taxed as ordinary income at your marginal rate, the same treatment as a traditional IRA.
Contributions are discretionary. In a strong year, contribute the maximum. In a lean year, skip the contribution entirely with no penalty and no obligation to make it up later.
Taking Money Out
You can withdraw from a SEP IRA at any time. Before age 59½, the distribution counts as ordinary income and takes an additional 10% early withdrawal tax.9Internal Revenue Service. Retirement Plans FAQs Regarding IRAs Distributions (Withdrawals)
Several exceptions waive the 10% penalty even before 59½:10Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
- Total and permanent disability
- Substantially equal periodic payments (72(t) payments)
- Unreimbursed medical expenses exceeding 7.5% of AGI
- Health insurance premiums paid while unemployed
- Qualified higher education expenses
- First-time home purchase, up to $10,000 lifetime
- Birth or adoption expenses, up to $5,000 per child
- Federally declared disaster, up to $22,000
- IRS levy against the account
At age 73, required minimum distributions begin. The SECURE 2.0 Act pushes the starting age to 75 beginning in 2033. Miss an RMD or take less than required and the shortfall carries a 25% excise tax, dropping to 10% if corrected within two years.11Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
SEP IRA or Solo 401(k)
If you’re a 1099 contractor with no employees, the Solo 401(k) is the SEP IRA’s main competitor. Both hit the same overall dollar ceiling ($72,000 for 2026 under age 50), but they get there very differently.
A SEP IRA allows employer contributions only, capped at 20% of adjusted net earnings. A Solo 401(k) lets you contribute in two roles: as the employee (up to $24,500 in elective deferrals for 2026) and as the employer (up to 20% of adjusted net earnings on top).12Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Over 50, the Solo 401(k) allows catch-up contributions of $8,000; ages 60 through 63 can add $11,250.
At lower income levels the gap is dramatic. A freelancer with $60,000 in net profit can put in roughly $11,000 to a SEP IRA (20% of adjusted earnings) but closer to $35,000 in a Solo 401(k) by maxing the employee deferral and adding the employer portion. The SEP IRA only catches up at very high income where 20% of earnings approaches the dollar cap.
The tradeoff is simplicity. A SEP IRA has almost no ongoing administration. A Solo 401(k) requires filing Form 5500-EZ once plan assets exceed $250,000, and its initial plan document is more involved. The Solo 401(k) also offers plan loans and a built-in Roth option, neither of which a standard SEP IRA provides. Set-it-and-forget-it with high enough income to max out either way favors the SEP; freelancers under about $150,000 usually shelter more in a Solo 401(k).
If You Hire Employees
The SEP IRA works cleanly when you’re the only person in the business. Once you bring on workers, the rules change. You must include any employee who is at least 21, has worked for you in at least three of the last five years, and earned at least $800 in compensation for the year.7Internal Revenue Service. Retirement Plans FAQs Regarding SEPs
The bigger constraint is the uniform contribution rule: whatever percentage you contribute for yourself, you must contribute the same percentage for every eligible employee.13Internal Revenue Service. SEP Plan Fix-It Guide – Contributions to Each Participants SEP-IRA Werent a Uniform Percentage of the Participants Compensation If you contribute 15% for yourself, you owe 15% for each qualifying employee. That cost is the main reason growing businesses eventually switch plans.
What You Cannot Hold or Do
A SEP IRA can hold most conventional investments: stocks, bonds, mutual funds, ETFs, CDs, and certain precious metals meeting purity requirements. Two categories are off-limits: life insurance and collectibles such as art, antiques, gems, stamps, and most coins.14Internal Revenue Service. Retirement Plan Investments FAQs
Prohibited transactions are a more serious risk. You cannot use SEP IRA funds for personal benefit, lend money between yourself and the account, or use the account to buy property you personally use. If the IRS finds a prohibited transaction, the entire IRA can lose its tax-exempt status. The full balance then gets treated as a distribution in the year of the violation, triggering income tax on the whole amount and potentially the 10% early withdrawal penalty on top.