2021 SEP IRA Contribution Limit
For 2021, the SEP IRA Contribution Limit figures are $58,000 (Defined contribution limit), $650 (Compensation threshold), 25% (Share of employee compensation) and 20% (Share of net earnings, self-employed).
Effective 2021-01-01Source: Notice 2020-79 (IRS)Verified 2026-09-03
Share of employee compensation, Share of net earnings, self-employedSource: Publication 560 (2021), Retirement Plans for Small Business (IRS)Verified 2026-09-03
Compared with 2020
| Item | 2020 | 2021 | Change |
|---|---|---|---|
| Defined contribution limit | $57,000 | $58,000 | +$1,000 (+1.8%) |
| Compensation threshold | $600 | $650 | +$50 (+8.3%) |
| 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 Simplified Employee Pension (SEP) IRAs under IRC Section 408(k).
What changed this year, and why
For 2021, the IRS increased the defined contribution limit for SEP IRAs to $58,000 (up from $57,000 in 2020) and raised the minimum compensation threshold to $650 (up from $600 in 2020). The employer contribution percentage remains 25% of compensation.
Common questions
- What is the maximum contribution to a SEP IRA for 2021?
- For 2021, the overall defined contribution limit for a SEP IRA is $58,000. However, employer contributions are also limited to 25% of an employee's compensation, so the actual maximum contribution for any individual is the lesser of $58,000 or 25% of compensation.
- What is the minimum compensation an employee must earn to be eligible for a SEP IRA in 2021?
- For 2021, an employee must have at least $650 in compensation to be eligible to receive a SEP IRA contribution from their employer.
- What percentage of compensation can an employer contribute to a SEP IRA?
- An employer may contribute up to 25% of an employee's compensation to a SEP IRA, subject to the overall $58,000 defined contribution limit for 2021.
The 25% of compensation ceiling
For 2021, the total contributions to a SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $58,000. This ceiling applies whether you are making nonelective contributions for an employee or contributing to your own SEP-IRA. The 25% limit is calculated based on the employee's compensation from the business that maintains the plan. If you have multiple employees, each participant's contribution is subject to this same percentage limit based on their individual compensation. This overall limit ensures that SEP contributions remain proportional to the compensation earned by each participant in the plan.
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 $58,000 for 2021 ($61,000 for 2022).
Publication 560 (2021), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
How much of the contribution you can deduct
For 2021, the maximum deduction you can claim for SEP contributions to your or your employee's SEP-IRA is the lesser of two amounts: your actual contributions (including any excess contributions carried over from prior years), or 25% of the compensation paid to participants during 2021. The compensation used for this calculation is limited to $290,000 per participant, and the deduction cannot exceed $58,000 per participant. This means that even if an employee earns more than $290,000, you can only use $290,000 when figuring the 25% limit. The deduction limit ensures that tax-deductible contributions stay within the boundaries set by the defined contribution limit and the compensation cap.
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 $290,000 per participant) paid to the par- ticipants during 2021, from the business that has the plan, not to exceed $58,000 per participant.
Publication 560 (2021), 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, you must use a special computation to determine your maximum deduction. For self-employed individuals, compensation is defined as net earnings from self-employment, which already accounts for two specific deductions: the deductible part of your self-employment tax and the deduction for contributions to your own SEP-IRA. Because these deductions affect each other, you cannot simply apply the contribution rate directly to your gross earnings. Instead, you must figure your deduction indirectly by adjusting the contribution rate. This special calculation ensures that your SEP deduction is based on your true net earnings after accounting for the interdependent nature of these deductions.
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 (2021), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A self-employed person uses a reduced contribution rate
Because the deduction for SEP contributions and your net earnings from self-employment depend on each other, you cannot simply apply the stated contribution rate from your plan. Instead, you determine the deduction indirectly by reducing the contribution rate called for in your plan. To calculate this reduced rate, you must use either the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, depending on which is appropriate for your plan's contribution rate. These tables and worksheets are provided in chapter 5 of the IRS guidance. After determining the reduced rate, you then use the Deduction Worksheet for Self-Employed to figure your maximum deduction. This adjustment accounts for the fact that contributions themselves reduce the net earnings on which the contribution percentage is based.
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 5.
Publication 560 (2021), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
Who must be included, and who can be left out
For 2021, an eligible employee is an individual who meets all three of the following requirements: the employee has reached age 21, has worked for the employer in at least 3 of the last 5 years, and has received at least $650 in compensation from that employer during the year. Employers may use less restrictive eligibility rules if they wish, but they cannot make the rules more restrictive than these minimums. Employees who meet all three criteria must be included in the SEP and must receive allocations, while those who do not meet every one of these requirements can be excluded from coverage. Certain other employees, such as those covered by a collective bargaining agreement, may also be excluded.
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.
Publication 560 (2021), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A SEP for last year can still be opened this spring
Employers do not have to establish a SEP by December 31 to make contributions for that tax year. Instead, a SEP for 2021 can be set up as late as the due date (including extensions) of the employer's income tax return for that year. This means businesses with an extension have until October 17, 2022 to establish the plan and still make contributions for 2021. Once established, the SEP must be maintained for each eligible employee, and contributions can be made up to that same filing deadline.
Deadline for setting up a SEP. 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 (2021), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
The form that establishes the plan, and what it does for you
A SEP can be established using a formal written agreement, and the simplest way to satisfy this requirement is by adopting an IRS model SEP using Form 5305-SEP. When an employer uses this form, no prior approval or determination letter from the IRS is needed. The employer keeps the original form and does not file it with the IRS. Using Form 5305-SEP also typically relieves the employer from filing annual retirement plan information returns with both the IRS and the Department of Labor. However, there are restrictions on when this form can be used, such as when the employer already maintains another qualified retirement plan or has eligible employees for whom IRAs have not yet been set up.
You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. However, see When not to use Form 5305-SEP, later. If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determina- tion letter is required. Keep the original form. Don't file it with the IRS.
Publication 560 (2021), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A contribution too big to deduct this year carries into next year
If SEP contributions exceed the deduction limit for a tax year, the excess amount is considered a nondeductible contribution. Rather than losing this excess entirely, the employer can carry over and deduct the difference in later years. However, the carryover amount, when combined with any contributions made for that later year, remains subject to that year's deduction limit. This means the excess is not simply added on top of the next year's full contribution allowance. The carryover provision allows employers to eventually deduct contributions that exceeded the limit in a prior year, though the timing of the deduction depends on available room under future years' limits.
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. However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year.
Publication 560 (2021), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
Contributing more than the deduction limit costs a 10% excise tax
When SEP contributions exceed the deduction limit, the excess amount is treated as a nondeductible contribution. If an employer makes such nondeductible contributions to a SEP, they may be subject to a 10% excise tax on the excess amount. This tax applies to contributions that cannot be deducted in the current year, whether because they exceed the overall contribution limits or the deduction limits based on employee compensation. The excise tax is reported separately and must be paid by the employer. However, if the excess contributions are later deducted in a subsequent year through the carryover provision, the excise tax may not apply to those amounts in the later year.
Excise tax. If you made nondeductible (ex- cess) contributions to a SEP, you may be sub- ject to a 10% excise tax.
Publication 560 (2021), 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 2020-79 (IRS)
- Defined contribution limit
The limitation for defined contribution plans under § 415(c)(1)(A) is increased for 2021 from $57,000 to $58,000.
- Compensation threshold
The compensation amount under § 408(k)(2)(C) regarding simplified employee pensions (SEPs) is increased from $600 to $650.
Publication 560 (2021), Retirement Plans for Small Business (IRS)
Contributions you make for 2021 to a com- mon-law employee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $58,000.
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.