Is a SEP-IRA Tax Deductible?

Quick Answer: ✅ Yes — SEP-IRA contributions are tax-deductible and one of the most powerful retirement deductions for self-employed individuals. You can contribute up to 25% of net self-employment income, up to $70,000 in 2026.

The Short Answer

A Simplified Employee Pension IRA (SEP-IRA) lets self-employed individuals and small business owners make tax-deductible contributions to a retirement account. It's one of the highest-limit retirement plans available to sole proprietors and freelancers. Contributions reduce your taxable income dollar-for-dollar, and the money grows tax-deferred until withdrawal.

IRS Rules for Deducting SEP-IRA Contributions

The IRS allows SEP-IRA deductions under these rules:

1. You must have self-employment income — W-2 income alone doesn't qualify for a SEP-IRA (your employer would need to set one up). This is for self-employed individuals, freelancers, and small business owners.
2. Contribution limit: 25% of net self-employment earnings — "Net" means your profit after deducting half of your self-employment tax. The maximum is $70,000 for 2026 (indexed annually for inflation).
3. Contributions are made by the business — The business contributes to the SEP-IRA, not the employee. If you have employees, you must contribute the same percentage for all eligible employees.
4. Deadline to contribute: You can make SEP-IRA contributions up until your tax filing deadline (including extensions). Filed an extension to October 15? You have until then to contribute for the prior year.

Source: IRS Publication 560 — Retirement Plans for Small Business

Contribution Calculation for Self-Employed

The math is slightly different for sole proprietors than for corporations:

Sole Proprietors / LLCs:

• Start with net profit (Schedule C)
• Subtract half of self-employment tax
• Multiply by 20% (the effective rate after the self-employment adjustment — not 25%)
• Cap at $70,000

S-Corp Owners:

• Contribute up to 25% of W-2 wages paid to yourself
• Cap at $70,000

How Much Can You Deduct?

100% of your SEP-IRA contribution is deductible. It's an "above-the-line" deduction — you get it even if you don't itemize.

Example — Sole Proprietor:

• Net self-employment income: $150,000
• Self-employment tax deduction (half): ~$10,597
• Adjusted earnings: ~$139,403
• Max SEP contribution (20%): $27,881
• Tax savings at 24% bracket: ~$6,691

Example — S-Corp Owner:

• W-2 salary from your S-Corp: $100,000
• Max SEP contribution (25%): $25,000
• Tax savings at 24% bracket: ~$6,000

How to Categorize in QuickBooks

• QBO Category: This is NOT a regular business expense in QBO. SEP-IRA contributions for the owner go on the personal tax return.
• Schedule C / 1040: Line 15 of Schedule 1 (Form 1040) — Self-employed SEP, SIMPLE, and qualified plans
• For S-Corps: The employer contribution is a business expense — categorize as "Employee Benefit Programs" or "Retirement Plan Contributions"
• Tip: Don't run SEP-IRA contributions through Schedule C expense categories. It's a personal deduction (above the line on Form 1040), not a business expense — unless you're an S-Corp making employer contributions.

Common Mistakes to Avoid

1. Missing the contribution deadline — You have until your tax filing deadline (including extensions) to contribute. Many people don't realize they can open AND fund a SEP-IRA after December 31 for the prior year.
2. Using 25% instead of 20% for sole props — The effective contribution rate for sole proprietors is ~20% of net self-employment income (after the self-employment tax adjustment), not 25%. This confuses a lot of people.
3. Forgetting the employee requirement — If you have eligible employees, you MUST contribute the same percentage for them that you contribute for yourself. This can make SEP-IRAs expensive for businesses with staff.
4. Not knowing about Solo 401(k) as an alternative — If you have no employees, a Solo 401(k) may let you contribute even more through employee elective deferrals. Compare both with your CPA.

Record-Keeping Requirements

• SEP-IRA plan documents (your brokerage provides these)
• Contribution receipts showing date and amount
• Calculation worksheet showing how you arrived at the contribution amount
• For businesses with employees: records showing equal percentage contributions
• Year-end brokerage statements

Who Can Deduct SEP-IRA Contributions?

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