2020 SEP IRA Contribution Limit
For 2020, the SEP IRA Contribution Limit is $57,000 (Defined contribution limit), $600 (Compensation threshold) and 25% (Share of employee compensation).
Effective 2020-01-01Source: Notice 2019-59 (IRS)Verified 2026-08-29
Share of employee compensationSource: Publication 560 (2020), Retirement Plans for Small Business (IRS)Verified 2026-08-29
Compared with 2019
| Item | 2019 | 2020 | Change |
|---|---|---|---|
| Defined contribution limit | $56,000 | $57,000 | +$1,000 (+1.8%) |
| Compensation threshold | $600 | $600 | +$0 (+0.0%) |
| Share of employee compensation | 25% | 25% | +0% (+0.0%) |
Who it applies to
Employers and self-employed individuals who maintain Simplified Employee Pension (SEP) IRA plans under IRC Section 408(k).
What changed this year, and why
For 2020, the defined contribution limit under IRC Section 415(c)(1)(A), which caps contributions to SEP IRAs, increased to $57,000. The compensation threshold under Section 408(k)(2)(C) - the minimum an employee must earn to be eligible for SEP contributions - remains unchanged at $600.
Common questions
- What is the maximum contribution to a SEP IRA for 2020?
- The SEP IRA is governed by the rules for defined contribution plans. For 2020, the defined contribution limit is $57,000.
- What is the minimum compensation an employee must earn to be eligible for a SEP in 2020?
- An employer must contribute on behalf of any employee who has earned at least $600 in compensation.
The 25% of compensation ceiling
For 2020, the total contributions (nonelective and elective combined) that can be made to a participant's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $57,000. This same cap applies to contributions you make to your own SEP-IRA. The $57,000 defined contribution limit and the 25% share of employee compensation work together as a dual ceiling: whichever amount is smaller sets the maximum that may go into the account for the year. Compensation used in the 25% calculation is subject to its own annual cap, so the actual dollar limit may be reached even before the flat $57,000 figure. Employers must track each participant's compensation from the business that maintains the plan to apply the percentage test correctly. The rule ensures that SEP contributions remain proportionate to pay and prevents highly compensated participants from receiving outsized allocations relative to their earnings.
Catch-up contributions aren't subject to the elective deferral limit (the lesser of 25% of com- pensation or $19,500 in 2020 and 2021). 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 $57,000 for 2020 ($58,000 for 2021).
Publication 560 (2020), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
How much of the contribution you can deduct
The deduction you can take each year for contributions to a SEP-IRA - whether for an employee or for your own account - is limited to the lesser of two amounts: the amount of contributions you actually made (including any excess contributions carried over from an earlier year), or 25% of the compensation paid to the participant during 2020 from the business that has the plan. For 2020, that 25% share of compensation is computed on compensation limited to $285,000 per participant and may not exceed $57,000 per participant. This is the participant-level deduction cap, which is also the plan's contribution ceiling, so the most you can deduct per person is $57,000 in 2020.
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 $285,000 per participant) paid to the par- ticipants during 2020, from the business that has the plan, not to exceed $57,000 per participant.
Publication 560 (2020), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
For a self-employed person, compensation is net earnings
If you contribute to your own SEP-IRA, the compensation used to figure your maximum contribution and deduction is not your wages, but your net earnings from self-employment as defined in chapter 1 of the publication. That net-earnings figure already reflects two deductions that reduce the base: the deduction for the deductible part of your self-employment tax, and the deduction for contributions made to your own SEP-IRA. Because the contribution you make on your own behalf reduces the very net earnings that the contribution rate is applied to, the two amounts depend on each other. As a result, you cannot simply apply the plan's 25% rate to your gross net earnings; you must work through the special computation so the deduction for your own SEP contribution is figured on the reduced earnings base.
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. • The deduction for contributions to your own SEP-IRA.
Publication 560 (2020), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A self-employed person uses a reduced contribution rate
Because a self-employed person's SEP contribution and net earnings depend on each other, the IRS requires you to convert the plan's stated contribution rate into a lower rate before applying it to your net earnings from self-employment. A plan that calls for a 25% contribution for employees does not let a self-employed person contribute 25% of their net earnings; the rate must be reduced so that the contribution, taken as a percentage of net earnings after the contribution itself is subtracted, works out to 25%. You make this adjustment by using either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed in chapter 6, picking the one that matches your plan's contribution rate, and then you figure the maximum deduction using the Deduction Worksheet for Self-Employed. This reduction applies only to contributions made on your own behalf as a self-employed person; employees in the same plan still receive contributions at the full 25% rate.
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. To do this, use the Rate Table for Self-Employed or the Rate Work- sheet for Self-Employed, whichever is appropri- ate for your plan's contribution rate, in chap- ter 6.
Publication 560 (2020), 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 2019-59 (IRS)
- Defined contribution limit
The limitation for defined contribution plans under § 415(c)(1)(A) is increased in 2020 from $56,000 to $57,000.
- Compensation threshold
The compensation amount under § 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.
Publication 560 (2020), Retirement Plans for Small Business (IRS)
Contributions you make for 2020 to a com- mon-law employee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $57,000.