2025 SEP IRA Limits: 25% of Net Earnings or $70,000

The Internal Revenue Service has raised the 2025 limits for SEP retirement accounts used by self‑employed workers, increasing the maximum contribution to $70,000 and keeping the long‑standing rule that contributions cannot exceed 25% of net earnings from self-employment. The change, published in IRS cost‑of‑living adjustments in November 2024 and effective for the 2025 tax year, matters for sole proprietors, single‑member LLC owners, independent contractors, and small businesses that use a SEP plan to fund a SEP-IRA for themselves and any eligible staff.

As of August 27, 2025, the compensation cap used in the contribution formula also rises to $350,000, up from $345,000 in 2024, reflecting inflation adjustments.

What a SEP-IRA Is and Why It Matters

A SEP plan allows a business to make employer contributions into a SEP-IRA. For self‑employed people, the individual is both “employer” and “employee,” but contributions are treated as employer contributions made by the business. That design keeps paperwork light compared with some other retirement plans while allowing large, tax‑deductible deposits in strong years.

• Contributions must be made in cash (money, check, or money order)—property does not qualify.
• Earnings inside the account grow tax‑deferred until withdrawal in retirement.
• The SEP-IRA is typically simpler administratively than plans such as 401(k)s, making it attractive for many small businesses and sole proprietors.

2025 Policy Update and Key Limits

• Maximum SEP-IRA contribution for 2025: the lesser of 25% of net earnings from self‑employment or $70,000 (up from $69,000 in 2024).
• Compensation cap used to calculate the 25%: $350,000 for 2025 (up from $345,000).
• Contributions must be in cash only; property transfers don’t qualify.
• Contributions are made by the employer (the business), not the employee.
• Contributions are tax‑deductible and grow tax‑deferred until withdrawal.
• You can fund a SEP-IRA up to your tax filing deadline, including extensions (for example, April 15, 2026, for calendar‑year filers, or later if you file on extension).

For context, the 2024 max was $69,000 with a $345,000 compensation cap. The 2025 increase reflects the IRS’s annual cost‑of‑living adjustments.

The Math: Net Earnings and the Circular Calculation

On paper the limit is simple: the lesser of 25% of net earnings or $70,000. In practice, though, calculating allowable contributions can be tricky:

• “Net earnings from self‑employment” is not just business profit; it’s adjusted for:
  • the deductible portion of self‑employment tax, and
  • the SEP contribution itself (a circular calculation).
• The compensation cap of $350,000 also limits the 25% calculation.
• Because of these moving pieces, many filers use tax software or consult a professional to avoid overcontributing.

The IRS allows contributions up to the tax filing deadline, including extensions, giving business owners time to finalize income before funding.

Rules and Limitations — What SEP-IRAs Don’t Offer

• No employee salary deferrals (unlike many 401(k)s).
• No catch‑up contributions for those age 50+.
• Employer decides the contribution rate each year and may change it or skip a year.
• If the business has eligible employees, the employer must apply the same percentage to everyone.

This flexibility helps seasonal firms and freelancers manage uneven income while keeping the plan simple.

Practical Effects for Self‑Employed Workers

For Schedule C filers and single‑member LLC owners, the increased $70,000 limit provides more headroom in strong years.

Benefits and considerations:
– Ability to shelter more income than in a traditional IRA alone.
– Tax deduction can lower adjusted gross income and affect other tax items.
– Flexibility to contribute less in lean years and more in profitable years (within caps).

Real‑world scenarios:
1. A freelance designer sees a surge in work and funds a larger SEP-IRA contribution after the accountant models safe ranges below $70,000.
2. A solo therapist contributes a small percentage in a lean year and increases it in a strong year, using the plan’s flexibility.
3. A small firm sets a 5% contribution rate for owner and employees, keeping contributions uniform and compliant.

Contribution Timing, Cash Rule, and Investment Choices

• Contributions must be made in cash—no transfers of appreciated stock or property.
• Once deposited, investment choices depend on the plan custodian (banks/brokerages often offer many options).
• SEP-IRA contributions can be made up to the tax filing deadline, including extensions, so late‑year startups can fund once final numbers are known.

Implementation, Compliance, and Recordkeeping

Setting up and maintaining a SEP plan is generally straightforward:

1. Adopt a SEP plan document (many use IRS Form 5305-SEP or a prototype plan from a financial institution).
2. Open SEP-IRA accounts for the owner and any eligible employees.
3. Calculate allowable contributions (many custodians provide calculators).
4. Fund by the tax filing deadline, including extensions.
5. Keep records of plan documents, contribution calculations, deposit receipts, and proof that the same percentage was applied to eligible employees.

Official IRS resources:
– SEP contribution guidance: IRS SEP contribution limits page
– Model plan: IRS Form 5305-SEP

Common Cautions and Compliance Checklist

Important warnings:
– Don’t exceed the lesser of 25% of net earnings or $70,000 for 2025—overfunding triggers corrective steps.
– Don’t fund with property—cash only.
– If you have employees, apply the same percentage to all eligible workers.
– Mind the $350,000 compensation cap when calculating 25%.
– Remember: no catch‑up contributions in SEP‑IRAs.

Quick checklist before funding:
– Adopt a SEP plan document (e.g., IRS Form 5305-SEP).
– Open SEP-IRA accounts for owner and eligible employees.
– Estimate net earnings and model a safe contribution.
– Track the $350,000 cap and $70,000 limit.
– Fund in cash by the tax filing deadline (including extensions).
– Record the contribution as a business deduction and retain plan documentation.

How SEP-IRAs Fit with Other Retirement Accounts

• SEP‑IRA limits are separate from traditional or Roth IRA limits.
• For 2025, IRA contribution limits remain $7,000, or $8,000 if age 50+.
• Many owners contribute to both a SEP-IRA and a separate IRA to maximize tax‑advantaged savings.

Planning Patterns and Administrative Notes

Common approaches owners discuss with advisors:
– Estimate a conservative contribution late in the year, then top up after books close.
– Set aside a fixed percentage monthly to smooth year‑end funding.
– Pair a SEP-IRA with a traditional or Roth IRA for additional retirement savings.

Administrative notes:
– No annual Form 5500 filing for SEP-IRAs.
– Employer contributions appear as a business deduction on tax returns.
– Keep plan documents and eligibility records current, especially if ownership or payroll systems change.

Takeaway

The 2025 updates—raising the SEP‑IRA cap to $70,000 and the compensation limit to $350,000—maintain the SEP’s role as a low‑paperwork, high‑limit retirement option for self‑employed professionals and small employers. While the plan is simple in design, the calculation of net earnings for SEP purposes can be complex. A short meeting with a CPA or using plan‑custodian worksheets can prevent overfunding and ensure you maximize the opportunity within the rules.

For official information and plan adoption forms, see the IRS guidance at the links below:
– IRS SEP contribution limits page
– IRS Form 5305-SEP