2022 SEP IRA Contribution Limit
For 2022, the SEP IRA Contribution Limit figures are $61,000 (Defined contribution limit), $650 (Compensation threshold), 25% (Share of employee compensation) and 20% (Share of net earnings, self-employed).
Effective 2022-01-01Source: Notice 2021-61 (IRS)Verified 2026-09-03
Share of employee compensation, Share of net earnings, self-employedSource: Publication 560 (2022), Retirement Plans for Small Business (IRS)Verified 2026-09-03
Compared with 2021
| Item | 2021 | 2022 | Change |
|---|---|---|---|
| Defined contribution limit | $58,000 | $61,000 | +$3,000 (+5.2%) |
| Compensation threshold | $650 | $650 | +$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 employees who participate in Simplified Employee Pension (SEP) IRAs
What changed this year, and why
For 2022, the IRS announced cost-of-living adjustments to retirement plan limits effective January 1, 2022. The defined contribution plan limit under section 415(c)(1)(A), which caps the total amount that can be contributed to a SEP IRA on behalf of an employee, increased to $61,000. The compensation threshold under section 408(k)(2)(C) for simplified employee pensions remained unchanged at $650; an employee who earns at least this amount in a year must be included in the employer's SEP.
Common questions
- What is the maximum contribution to a SEP IRA for 2022?
- The overall defined contribution limit is $61,000 for 2022. An employer's actual SEP contribution for each eligible employee is the lesser of a set percentage of compensation or this cap.
- What is the minimum compensation an employee must earn to be included in a SEP for 2022?
- The compensation threshold is $650 for 2022, unchanged from prior years. An employee who received at least $650 in compensation must be covered if the employer establishes a SEP.
The 25% of compensation ceiling
For 2022, the amount an employer may contribute to a common-law employee's SEP-IRA is capped at the lesser of 25% of the employee's compensation or $61,000. Employer contributions themselves are generally not counted as part of the compensation base used to compute the 25% figure. The plan document dictates the formula the employer uses to arrive at each participant's contribution and how that contribution is allocated. A self-employed individual who maintains a SEP for himself or herself is subject to the same overall cap, but the self-employed person must use a special computation because the contribution itself reduces the net-earnings figure that serves as the compensation base. Once the contribution rate stated in the plan is reduced using the IRS tables or worksheets, the 25% rate effectively becomes a lower percentage that, applied to net earnings, never produces a contribution in excess of the $61,000 defined-contribution ceiling for 2022.
Contributions you make for 2022 to a common-law em- ployee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $61,000.
Publication 560 (2022), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
How much of the contribution you can deduct
For 2022, the most an employer may deduct for SEP-IRA contributions on behalf of any one participant is the smaller of two figures: the total amount contributed (counting any excess contributions carried over from an earlier year), or 25% of the compensation paid to the participant during the year from the business that maintains the plan, but that compensation figure is itself capped at $305,000 per participant. Applying the 25% rate to that compensation cap yields an amount above the per-participant ceiling of $61,000, so the effective deduction limit for 2022 is $61,000 per participant. The plan document controls the employer contribution formula and the allocation among participants. A self-employed individual who contributes to his or her own SEP-IRA must first perform a special computation because the contribution reduces the net-earnings figure that serves as the compensation base; the contribution rate stated in the plan must also be reduced using the IRS self-employed tables before the deduction is calculated.
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 $305,000 per participant) paid to the participants during 2022, from the business that has the plan, not to exceed $61,000 per participant.
Publication 560 (2022), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
For a self-employed person, compensation is net earnings
A self-employed person's compensation for SEP purposes is not simply gross business income; it is net earnings from self-employment as defined in the tax code, and that definition already accounts for two deductions: the deductible part of self-employment tax and the SEP contribution itself. Because the contribution reduces the very earnings on which the contribution percentage is applied, the math becomes circular. The IRS requires a special computation to break the circle. The result is that the stated plan rate of 25% must first be converted to a lower equivalent rate using the self-employed tables or worksheets in the publication before it is applied to net earnings. This ensures the final contribution never exceeds the lesser of the adjusted compensation times the reduced rate or the $61,000 defined-contribution ceiling for 2022.
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 con- tributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chap- ter 1), which takes into account both the following deduc- tions.
Publication 560 (2022), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A self-employed person uses a reduced contribution rate
Because a self-employed individual's own SEP contribution and that individual's net earnings depend on each other, the deduction for the contribution cannot be calculated by simply applying the plan rate to net earnings. Instead, the plan's stated contribution rate must first be reduced to an equivalent rate that accounts for the circular relationship. The IRS provides a Rate Table for Self-Employed and a Rate Worksheet for Self-Employed in the publication, and whichever one matches the plan's contribution rate is used to find the reduced rate. That reduced rate is then applied to net earnings from self-employment to determine the maximum deductible contribution. For 2022, the overall defined-contribution limit is $61,000, and the net earnings used in the calculation are also reduced by the deductible part of self-employment tax and by the contribution itself, so the effective contribution is always less than the stated 25% rate applied to gross self-employment income.
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 Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5.
Publication 560 (2022), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
Who must be included, and who can be left out
An employer must include every employee who satisfies three tests: the worker must have reached age 21, must have worked for the employer in at least 3 of the last 5 years, and must have received at least $650 in compensation from the employer in 2022. An employer may adopt less restrictive eligibility rules than these, but may not adopt more restrictive ones. A leased employee may also have to be covered, while certain excludable employees can be left out entirely. Once a worker meets the tests, the employer must establish a SEP-IRA for that employee. Contributions for each eligible employee are limited to 25% of the employee's compensation, and the total contribution for the year may not exceed the defined contribution limit of $61,000.
Eligible employee. An eligible employee is an individual who meets all the following requirements. • Has reached age 21. • Has worked for you in at least 3 of the last 5 years. • Has received at least $650 in compensation from you in 2022.
Publication 560 (2022), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A SEP for last year can still be opened this spring
A self-employer's SEP is subject to the defined contribution limit of $61,000 and a compensation threshold of $650. Contributions cannot exceed 25% of the employee's compensation. The SEP can be set up as late as the due date (including extensions) of the income tax return for the year.
as late as the due date (including extensions)
Publication 560 (2022), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
The form that establishes the plan, and what it does for you
Employers can satisfy the formal written agreement requirement for a SEP by using the IRS model document, Form 5305-SEP. If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. You keep the original form and do not file it with the IRS. Using Form 5305-SEP will also usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. There are restrictions on when Form 5305-SEP can be used: you cannot use it if you currently maintain another qualified retirement plan (other than another SEP), if you have eligible employees for whom IRAs have not been set up, or if you use leased employees who are not your common-law employees. If any of those situations apply, you will need to adopt a prototype or individually designed SEP instead. Contributions under a SEP are limited to 25% of compensation, and for 2022 the defined contribution limit is $61,000.
If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required.
Publication 560 (2022), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A contribution too big to deduct this year carries into next year
The document states that "If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years." This means that if you contribute more than you can deduct in a given year, the excess amount is not lost. You may carry the nondeductible portion forward and claim it as a deduction in a subsequent tax year. However, when you deduct the carryover, it is combined with any contributions made for that later year, and the combined total is still subject to that year's deduction limit. For a SEP, the deduction limit is 25% of the participating employees' compensation for that year, and the overall contribution limit for 2022 is the defined contribution limit of $61,000. The document also warns that the carryover rules interact with other plans you may maintain, so you should review the carryover limit if you also contributed to a defined benefit or defined contribution plan.
If you made SEP contributions that are more than the de- duction limit (nondeductible contributions), you can carry over and deduct the difference in later years.
Publication 560 (2022), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
Contributing more than the deduction limit costs a 10% excise tax
A self-employer's SEP is subject to the defined contribution limit of $61,000 and a compensation threshold of $650. Contributions cannot exceed 25% of the employee's compensation. The SEP can be set up as late as the due date (including extensions) of the income tax return for the year.
you may be subject to a 10% excise tax
Publication 560 (2022), 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 2021-61 (IRS)
- Defined contribution limit
The limitation for defined contribution plans under section 415(c)(1)(A) is increased in 2022 from $58,000 to $61,000.
- Compensation threshold
The compensation amount under section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $650.
Publication 560 (2022), Retirement Plans for Small Business (IRS)
Contributions you make for 2022 to a common-law em- ployee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $61,000.
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.