2016 SEP IRA Contribution Limit
For 2016, the SEP IRA Contribution Limit figures are $53,000 (Defined contribution limit), $600 (Compensation threshold), 25% (Share of employee compensation) and 20% (Share of net earnings, self-employed).
Effective 2016-01-01Source: Notice 2015-75 (IRS)Verified 2026-09-03
Share of employee compensation, Share of net earnings, self-employedSource: Publication 560 (2016), Retirement Plans for Small Business (IRS)Verified 2026-09-03
Who it applies to
Employers and self-employed individuals who maintain Simplified Employee Pension (SEP) IRAs under IRC Section 408(k)
What changed this year, and why
For 2016, the IRS announced the cost-of-living adjustments (or lack thereof) for SEP IRA contribution limits under IRC Section 415 and related provisions. The defined contribution limit remained unchanged at $53,000, the compensation threshold for eligibility remained at $600, and the employer contribution rate remained at 25% of compensation.
Common questions
- What is the maximum contribution to a SEP IRA for 2016?
- The maximum contribution a employer can make to an employee's SEP IRA for 2016 is the lesser of 25% of the employee's compensation or $53,000.
- What is the minimum compensation an employee must earn to be eligible for a SEP IRA contribution?
- An employee must have at least $600 in compensation to be eligible for employer contributions to a SEP IRA in 2016.
- Did the SEP IRA limits change from the prior year?
- No. The defined contribution limit of $53,000, the $600 compensation threshold, and the 25% contribution rate all remained unchanged for 2016.
The 25% of compensation ceiling
For 2016, the total of nonelective and elective contributions to a SEP IRA cannot exceed the lesser of 25% of the employee's compensation or $53,000. This cap applies to contributions an employer makes for each employee as well as contributions a self-employed person makes to their own SEP IRA. If compensation is low, the 25% share may produce a smaller dollar amount than $53,000, making the percentage the binding constraint. If compensation is high enough that 25% would surpass $53,000, the fixed dollar ceiling takes effect instead. Compensation used to figure the 25% share is generally the employee's pay from the business that sponsors the plan. The same overall ceiling governs employer contributions and elective deferrals combined, so any mix of the two must stay within this boundary for each participant.
the lesser of 25% of the employee's compensa tion or $53,000 for 2016 ($54,000 for 2017).
Publication 560 (2016), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
How much of the contribution you can deduct
For 2016, the most an employer can deduct for contributions to a participant's SEP IRA is the lesser of the actual contributions made or 25% of the compensation paid to that participant from the business sponsoring the plan, with that deduction capped at $53,000 per participant. This means that even if you contribute more than $53,000 for someone, the deductible portion cannot surpass that dollar figure. The deduction also cannot exceed the total contributions you actually made, including any excess contributions carried over from prior years. Compensation for this purpose is limited to $265,000 per participant, which affects how the 25% figure is computed for highly paid employees. The deduction limit applies separately to each participant, so you add up the deductible amount for each person to determine your total business deduction for the year.
2. 25% of the compensation (limited to $265,000 per participant) paid to the par ticipants during 2016 from the business that has the plan, not to exceed $53,000 per participant.
Publication 560 (2016), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
For a self-employed person, compensation is net earnings
If you are self-employed and contribute to your own SEP IRA, your compensation is not simply your gross pay. Instead, compensation is defined as your net earnings from self-employment, which requires a special computation that takes into account two deductions: the deductible part of your self-employment tax and the deduction for contributions to your own SEP IRA. These two items are interrelated because the amount you can deduct for your SEP contribution depends on your net earnings, and your net earnings depend on the deductions you claim. The IRS requires you to figure your maximum deduction indirectly rather than by applying the plan's stated contribution percentage directly to your net earnings. This special computation ensures that the contribution and the deduction are calculated on a consistent basis that reflects the true compensation figure after accounting for these self-employment-specific adjustments.
If you contribute to your own SEPIRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEPIRA, compensation is your net earnings from selfemployment (de fined in chapter 1), which takes into account both the following deductions. The deduction for the deductible part of your selfemployment tax. The deduction for contributions to your own SEPIRA.
Publication 560 (2016), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A self-employed person uses a reduced contribution rate
Because your SEP IRA contribution deduction and your net earnings from self-employment depend on each other, you cannot simply apply your plan's contribution rate directly to your net earnings to figure your deduction. Instead, you must reduce the contribution rate called for in your plan to arrive at the correct percentage to use. The IRS provides a Rate Table for Self-Employed and a Rate Worksheet for Self-Employed in chapter 5 of the publication to help you convert the plan's stated rate into the reduced rate that applies to self-employed individuals. Once you have the reduced rate, you use the Deduction Worksheet for Self-Employed, also in chapter 5, to figure your maximum deduction. This indirect method accounts for the fact that the contribution itself reduces the compensation base on which it is calculated, a circular relationship that does not arise for employees whose compensation is simply their pay from the employer.
The deduction for contributions to your own SEPIRA and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your own SEPIRA indirectly by reducing the contribution rate called for in your plan. To do this, use the Rate Table for SelfEmployed or the Rate Work sheet for SelfEmployed, whichever is appropri ate for your plan's contribution rate, in chap ter 5. Then figure your maximum deduction by using the Deduction Worksheet for SelfEm ployed in chapter 5.
Publication 560 (2016), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A SEP for last year can still be opened this spring
A simplified employee pension plan does not have to be established by December 31 of the tax year it covers. The IRS allows an employer to set up a SEP for a given year as late as the due date of the employer's federal income tax return for that year, including any extension of time to file. For a calendar-year sole proprietor, for example, this typically means the SEP can be established as late as October 15 of the following year if an extension was filed, and the contributions for that prior year can be made at the same time. This flexibility gives business owners extra time to decide whether to fund a SEP and to arrange the paperwork with a bank, insurance company, or other qualified financial institution, as long as the plan document and each eligible employee's SEP-IRA are in place by that extended deadline.
You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year.
Publication 560 (2016), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
Contributing more than the deduction limit costs a 10% excise tax
When an employer contributes more to a simplified employee pension plan than the deduction limit permits for a tax year, the excess is called a nondeductible or excess contribution. On top of losing the current-year deduction for that amount, the employer may be subject to a 10% excise tax on the nondeductible contribution. The tax applies each year the excess remains in the plan and has not been corrected, so it can compound if the employer does not take steps to remove or absorb the excess in subsequent years. The employer reports and pays this excise tax using the procedures set out by the IRS for employer deductions. The 10% rate is applied to the amount of the nondeductible contribution itself, not to any earnings that the excess generates while it sits in the employee's SEP-IRA.
Excise tax. If you made nondeductible (ex cess) contributions to a SEP, you may be sub ject to a 10% excise tax.
Publication 560 (2016), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
How each figure was verified
Each number below was read from a stored copy of the document named beside it, and checked to occur word for word in the quoted sentence. The digest is of that stored text.
Notice 2015-75 (IRS)
- Defined contribution limit
The limitation for defined contribution plans under § 415(c)(1)(A) remains unchanged in 2016 at $53,000.
- Compensation threshold
The compensation amount under § 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.
Publication 560 (2016), Retirement Plans for Small Business (IRS)
Contributions you make for 2016 to a com monlaw employee's SEPIRA can't exceed the lesser of 25% of the employee's compensation or $53,000.
The deduction for annual employer contributions (other than elective deferrals) to a SEP plan, a profitsharing plan, or a money purchase plan can't be more than 20% of your net earnings (figured without deducting contributions for yourself) from the business that has the plan.