2018 SEP IRA Contribution Limit
For 2018, the SEP IRA Contribution Limit figures are $55,000 (Defined contribution limit), $600 (Compensation threshold), 25% (Share of employee compensation) and 20% (Share of net earnings, self-employed).
Effective 2018-01-01Source: Notice 2017-64 (IRS)Verified 2026-09-03
Share of employee compensation, Share of net earnings, self-employedSource: Publication 560 (2018), Retirement Plans for Small Business (IRS)Verified 2026-09-03
Compared with 2017
| Item | 2017 | 2018 | Change |
|---|---|---|---|
| Defined contribution limit | $54,000 | $55,000 | +$1,000 (+1.9%) |
| Compensation threshold | $600 | $600 | +$0 (+0.0%) |
| Share of employee compensation | 25% | 25% | +0% (+0.0%) |
| Share of net earnings, self-employed | 20% | 20% | +0% (+0.0%) |
Who it applies to
Employers and self-employed individuals who maintain a Simplified Employee Pension (SEP) IRA plan
What changed this year, and why
For 2018, the defined contribution plan limit under IRC § 415(c)(1)(A) is $55,000, effective January 1, 2018. The compensation threshold for simplified employee pensions (SEPs) under § 408(k)(2)(C) remains $600.
Common questions
- What is the maximum contribution to a SEP IRA for 2018?
- An employer may contribute the lesser of the defined contribution limit or a percentage of the employee's compensation, as set by the plan formula. The defined contribution limit is $55,000 for 2018.
- What is the minimum compensation an employee must earn for an employer to make a SEP contribution?
- The employee must have received at least $600 in compensation from the employer for the year.
The 25% of compensation ceiling
For 2018, the IRS places a cap on the total amount that can be contributed to a SEP-IRA. When an employer makes both nonelective contributions and elective contributions (such as those made through a salary reduction arrangement) to the same SEP-IRA, the combined total cannot go above the lesser of 25% of the employee's compensation or $55,000. This same ceiling also applies to contributions an individual makes to their own SEP-IRA. The $55,000 figure is the defined contribution limit for the year. The 25% share means that the contribution is proportional to earnings, but it cannot exceed the dollar cap regardless of how high compensation may be.
Overall limit on SEP contributions. If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elec- tive contributions to that SEP-IRA can't exceed the lesser of 25% of the employee's compensa- tion or $55,000 for 2018 ($56,000 for 2019). The same rule applies to contributions you make to your own SEP-IRA.
Publication 560 (2018), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
How much of the contribution you can deduct
An employer who contributes to a SEP-IRA can generally deduct those contributions in the year they are made, but the deduction is subject to a cap. The most the employer can deduct for contributions to any one participant's SEP-IRA is the lesser of two amounts: the actual contributions made (including any excess contributions carried over from an earlier year), or 25% of the compensation paid to that participant during 2018 from the business that maintains the plan. For 2018, the compensation taken into account is limited to $275,000 per participant, so the 25% calculation cannot produce a deduction greater than $55,000 per participant. If contributions exceed this deduction limit, the excess is not lost; it can be carried over to a future year.
The most you can deduct for your contributions to your or your employee's SEP-IRA is the lesser of the following amounts. 1. Your contributions (including any excess contributions carryover). 2. 25% of the compensation (limited to $275,000 per participant) paid to the par- ticipants during 2018 from the business that has the plan, not to exceed $55,000 per participant.
Publication 560 (2018), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
For a self-employed person, compensation is net earnings
A self-employed individual who contributes to his or her own SEP-IRA must use a special computation to determine the maximum deduction. For a self-employed person, the compensation used in the calculation is not wages but net earnings from self-employment. Net earnings from self-employment already reflect two deductions that reduce the base: the deductible part of the self-employment tax and the deduction for contributions made to the individual's own SEP-IRA. Because the deduction for contributions depends on net earnings, and net earnings depend on the contribution deduction, the two figures are interdependent. This circular relationship is why a self-employed person cannot simply apply the 25% rate directly to gross self-employment income and must instead follow the worksheets provided by the IRS.
If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (de- fined in chapter 1), which takes into account both the following deductions. • The deduction for the deductible part of your self-employment tax.
Publication 560 (2018), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A self-employed person uses a reduced contribution rate
Because the deduction for contributions to a self-employed person's own SEP-IRA and the person's net earnings depend on each other, the IRS does not allow a self-employed individual to apply the plan's stated contribution rate directly. Instead, the individual must determine the deduction indirectly by reducing the contribution rate called for in the plan. The IRS provides a Rate Table for Self-Employed and a Rate Worksheet for Self-Employed to convert the plan rate into the reduced rate that applies to net earnings. Once the reduced rate is found, the individual uses the Deduction Worksheet for Self-Employed to calculate the maximum deduction. This reduced rate is always lower than the plan's nominal rate, reflecting the fact that the contribution itself is not part of the compensation base for a self-employed person.
The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan.
Publication 560 (2018), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
Who must be included, and who can be left out
For 2018, a simplified employee pension plan must cover every individual who meets all three tests: has reached age 21, has worked for the employer in at least 3 of the last 5 years, and has received at least $600 in compensation from that employer during the year. An employer may choose to use looser eligibility rules but may not tighten them. Certain workers can be excluded entirely from coverage, including employees whose retirement benefits were bargained for in good faith under a union agreement and nonresident alien employees who received no U.S.-source wages. Once someone qualifies as an eligible employee, a SEP-IRA must be set up by or for that person, and contributions must be made on the same terms for every eligible employee who participates.
Eligible employee. An eligible employee is an individual who meets all the following require- ments. • Has reached age 21. • Has worked for you in at least 3 of the last 5 years. • Has received at least $600 in compensa- tion from you in 2018.
Publication 560 (2018), 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 year it is intended to cover. As long as the employer files for an extension, the plan can be set up as late as the due date (including extensions) of the income tax return for that year. For a calendar-year business that obtains the automatic six-month extension, this means the SEP can be created and funded as late as October 15 of the following year. The same deadline applies whether the employer is a sole proprietor filing Schedule C, a partnership, or a corporation. Contributions made by this extended due date can be deducted on the tax return for the year the SEP is intended to cover, giving employers extra time to decide how much to contribute and to move the money into each eligible employee's SEP-IRA.
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 (2018), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A contribution too big to deduct this year carries into next year
If an employer contributes more than the deduction limit allows for a tax year, the excess is treated as a nondeductible contribution. The employer can carry over and deduct the difference in later years, but the carryover is subject to that later year's own deduction limit. For a simplified employee pension, the deduction limit is 25% of participating employees' compensation. In other words, the total of the current-year contribution plus any carried-over excess cannot exceed 25% of compensation for the year to which the deduction is taken. Any portion that still cannot be deducted in the later year remains available to carry forward into subsequent years until it is fully used. This rule gives employers a way to recover contributions that were too large for one year's limit rather than losing them outright, though the excess may also be subject to an excise tax until it is absorbed.
If you made SEP contributions that are more than the deduction limit (nondeductible contri- butions), you can carry over and deduct the dif- ference in later years.
Publication 560 (2018), 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 than the deduction limit to a simplified employee pension, the excess is a nondeductible contribution. The employer may be subject to a 10% excise tax on that excess each year it remains in the plan. The tax applies annually until the excess is eliminated, either by being deducted in a later year under the carryover rules or by being absorbed because compensation or the number of eligible employees rises enough to increase the deduction limit. For a SEP, the deduction limit is generally 25% of participating employees' compensation. The employer must report the excise tax on Form 5330 and pay it to the IRS. Once the previously excess contribution falls within a later year's deduction limit, the 10% tax no longer applies to that amount, so planning contributions within the limit each year avoids the recurring cost.
If you made nondeductible (ex- cess) contributions to a SEP, you may be sub- ject to a 10% excise tax.
Publication 560 (2018), 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 2017-64 (IRS)
- Defined contribution limit
The limitation for defined contribution plans under § 415(c)(1)(A) is increased in 2018 from $54,000 to $55,000.
- Compensation threshold
The compensation amount under § 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.
Publication 560 (2018), Retirement Plans for Small Business (IRS)
Contributions you make for 2018 to a com- mon-law employee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $55,000.
The deduction for annual employer contributions (other than elective deferrals) to a SEP plan, a profit-sharing plan, or a money purchase pension plan can't be more than 20% of your net earnings (figured without deducting contributions for yourself) from the business that has the plan.