Are SEP IRA Contributions Deductible? | Tax Deduction Rules

Yes—SEP IRA deposits are usually deductible for the business that funds them, if you stay inside IRS limits and report them on the correct return line.

A SEP IRA feels straightforward: put money in, lower taxable income, move on. The tricky part is that a SEP is an employer plan, even when you’re a one-person shop. That single detail changes who claims the write-off, where it shows up, and how you calculate your own limit when you’re self-employed.

Below you’ll get the deduction rules, the timing rules, and the paper trail that keeps the deduction clean.

What “Deductible” Means With A SEP IRA

SEP contributions are employer contributions. The deduction belongs to the employer that makes the deposit, not to the employee who receives it in a SEP-IRA account.

• Employees don’t make elective salary deferrals to a SEP. The employer decides the contribution rate and funds it.
• The deduction is tied to limits and reporting. A valid deposit can still cause trouble if it lands on the wrong line of the return.

Are SEP IRA Contributions Deductible? What Counts As A Deduction

In most setups, the deductible amount equals the amount the employer contributes for eligible participants, capped by IRS limits. If you run the business as a sole proprietor, partnership, S-corp, or C-corp, the “who” behind the deduction shifts, but the plan logic stays the same: employer money, employer deduction.

Sole proprietors and single-member LLCs

Your SEP deduction goes on your personal return as an adjustment to income, not as a Schedule C expense. The IRS states that self-employed plan contributions are deducted on Form 1040 Schedule 1 on the line for self-employed SEP, SIMPLE, and qualified plans, not on Schedule C. IRS guidance on calculating a self-employed plan contribution and deduction lays out that reporting point and the compensation limits used in the math.

Partnerships and corporations

A partnership or corporation deducts SEP contributions on its business return. For S-corp owner-employees, SEP limits are based on W-2 wages from that S-corp, not on shareholder distributions. The deduction still sits at the business level.

Employees in a company SEP

An employee usually can’t claim a personal SEP “IRA deduction” for the employer deposit. The deposit is still real retirement money for the employee, but the deduction belongs to the employer that made it.

SEP IRA Deduction Limits: The Rules Behind The Cap

Two limit concepts matter: a percentage limit and a dollar ceiling. Your deductible contribution is limited to the smaller of the two for each eligible person.

Annual limit rule

The IRS summary rule is simple: SEP deposits for an employee can’t exceed the lesser of 25% of compensation or the annual dollar cap. The IRS posts the current cap on its retirement plan limits page. SEP contribution limits (including grandfathered SARSEPs) lists the cap as $69,000 for 2026, along with the 25% rule and plan notes.

Self-employed owners don’t use “25% of profit”

If you’re self-employed, your SEP “compensation” is net earnings from self-employment after the self-employment tax adjustment, and the contribution itself affects the result. That’s why many sole proprietors see an effective rate around 20% when they follow the worksheet method. Use the IRS worksheet approach, not a shortcut, so the deduction matches the allowed limit.

Uniform rate for eligible employees

If your SEP covers employees, the plan normally requires the same contribution percentage for each eligible employee, including you. Picking a rate is not only a tax choice; it’s a payroll cost choice.

Timing: When A SEP Deposit Counts For A Tax Year

A SEP is flexible on timing. You can often set up and fund it after the calendar year ends, then still deduct it for that tax year if the deposit is made by the return due date.

The IRS SEP FAQs say a SEP can be set up for a year as late as the due date, including extensions, of the business income tax return for that year. IRS FAQs regarding SEPs also ties the funding window to that filing deadline.

Which deadline applies

The deadline follows the return that claims the employer deduction. Sole proprietors follow the individual return due date (plus any filed extension). Corporations follow their corporate due date (plus extension). The deposit has to land in the SEP-IRA account by that deadline to count for that year.

Where To Report The Deduction On Your Tax Forms

Reporting is where people slip. Here’s the practical map:

• Sole proprietor: Form 1040 Schedule 1, line for self-employed SEP/SIMPLE/qualified plans, then it flows into Form 1040.
• Partnership: Deduction on the partnership return, then it flows through K-1 reporting.
• S-corp or C-corp: Deduction on the corporate return as an employer retirement plan expense.

If you put your own SEP deduction on Schedule C, your adjusted gross income and self-employment tax math can be wrong. The IRS self-employed contribution and deduction page calls out the correct placement and calculation approach.

Table: SEP IRA Deductibility Scenarios At A Glance

Use this table to sanity-check your setup before you run the numbers.

Situation	Deduction result	Where it’s claimed
Sole proprietor contributes for self	Deductible within SEP limits	Form 1040 Schedule 1 adjustment to income
Sole proprietor contributes for eligible employees	Deductible within SEP limits	Form 1040 Schedule 1 adjustment to income
S-corp contributes for owner-employee	Deductible within SEP limits	S-corp return employer retirement expense
S-corp owner takes distributions only	No SEP limit based on distributions	Needs W-2 wages to base the percentage
Employee asks for a personal SEP deduction	Not deductible on the employee return	Employer claims it; employee receives deposit
Deposit made after the return due date	Not deductible for that tax year	May count for the next tax year if permitted
Deposit exceeds annual cap	Only allowed amount is deductible	Excess amount needs correction steps
SEP adopted after year end but before filing deadline	Deductible if funded by deadline	Same return as the sponsoring business

How To Calculate A Deductible SEP Amount

For many owners, the cleanest workflow is “rate first, cap check second.” That keeps the plan consistent across eligible employees and reduces surprise totals.

1) List eligible people and their plan compensation

Start with your plan document: eligibility rules and compensation definition. Pull payroll totals for each eligible employee. For self-employed owners, pull your net earnings figure and the self-employment tax adjustment inputs.

2) Pick a contribution percentage

Pick a rate you can fund for everyone who is eligible. If cash flow is tight, a smaller rate can still create a real deduction and keep the plan in good order.

3) Apply the IRS cap for each person

Multiply compensation by your chosen percentage, then compare that number to the annual dollar cap. Use the lower number. Repeat for each eligible participant.

4) Deposit the money by the right deadline

Make sure the funds reach each SEP-IRA by the return due date that applies to your business, counting any filed extension.

Records That Make The Deduction Easy To Back Up

If the IRS asks how you got your number, you want a tidy packet, not a memory test. Keep:

• Plan adoption paperwork and any amendments
• Payroll reports used for compensation figures
• Deposit confirmations for each SEP-IRA, with dates
• A one-page worksheet showing your percentage and the annual cap used

IRS Publication 560: The Official Reference For SEPs

Publication 560 covers SEPs, SIMPLE plans, and qualified plans. It includes the deduction rules and worksheets used to calculate self-employed limits. IRS Publication 560 (Retirement Plans for Small Business) is the best single source when you need the IRS language for your filing year.

Table: Clean Deduction Checklist Before You File

Run this checklist right before you sign your return. It’s built to catch the mistakes that most often lead to amendments.

Task	What to verify	Slip to avoid
Plan adoption is valid for the year	Signed adoption paperwork date	Funding a year the plan doesn’t cover
Eligible employees are included	Age, service time, pay totals	Skipping an eligible employee deposit
Same percentage used for all eligible staff	Chosen rate and compensation base	Different rates across eligible employees
Annual cap is applied	IRS cap for your tax year	Overfunding past the cap
Self-employed worksheet is used	Net earnings inputs and adjustment	Using straight net profit as “compensation”
Deposits are on time	Bank confirmations and posting dates	Depositing after the filing deadline
Deduction is on the right line	Draft return and schedules	Putting it on Schedule C
Proof is stored in one folder	PDF scans of plan, payroll, deposits	Losing records before questions arrive

Fast Red Flags That Often Force A Fix

• S-corp owner takes no W-2 wages, then tries to base SEP funding on distributions
• Owner deposit is made, but an eligible employee is missed
• Deposit posts after the return due date, but the deduction is claimed for the earlier year
• Self-employed owner deducts the SEP on Schedule C
• Owner uses 25% of net profit without the worksheet adjustment step

Next Steps If You Want The Deduction To Land Cleanly

Start by confirming your business type and where your deduction line lives. Then pull compensation totals, pick a percentage you can fund for everyone who is eligible, and cap-check each person against the IRS limit. Make the deposit by the filing deadline that applies to your return. Save the proof in one place.

Follow that routine and a SEP IRA deduction is usually smooth: it lowers taxable income, it’s easy to document, and it doesn’t depend on itemizing.