2023 SEP IRA Contribution Limit
For 2023, the SEP IRA Contribution Limit figures are $66,000 (Defined contribution limit), $750 (Compensation threshold), 25% (Share of employee compensation) and 20% (Share of net earnings, self-employed).
Effective 2023-01-01Source: Notice 2022-55 (IRS)Verified 2026-09-03
Share of employee compensation, Share of net earnings, self-employedSource: Publication 560 (2023), Retirement Plans for Small Business (IRS)Verified 2026-09-03
Compared with 2022
| Item | 2022 | 2023 | Change |
|---|---|---|---|
| Defined contribution limit | $61,000 | $66,000 | +$5,000 (+8.2%) |
| Compensation threshold | $650 | $750 | +$100 (+15.4%) |
| 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 Section 408(k) of the Internal Revenue Code.
What changed this year, and why
For 2023, the defined contribution limit under Section 415(c)(1)(A) is $66,000, and the compensation threshold for simplified employee pensions (SEPs) under Section 408(k)(2)(C) is $750. Both amounts are effective January 1, 2023.
Common questions
- What is the maximum employer contribution to a SEP IRA for 2023?
- For 2023, the overall defined contribution limit under Section 415(c)(1)(A) is $66,000. Employer contributions to a SEP IRA cannot exceed this amount.
- Is there a minimum compensation requirement for SEP IRA eligibility?
- Employers are not required to contribute for employees who earned less than $750 in compensation during the year.
The 25% of compensation ceiling
For 2023, an employer's contribution to each common-law employee's SEP-IRA is capped at the lower of two amounts: 25% of that employee's compensation, or $66,000. The employer may choose to contribute any amount up to that ceiling, but cannot exceed it. Compensation used to calculate the 25% limit generally excludes the employer's own SEP contributions. The same $66,000 defined contribution limit and 25% share of employee compensation ceiling apply to contributions the employer makes to his or her own SEP-IRA, though special computation rules may apply for self-employed individuals. The plan document controls how the contribution is calculated and allocated among participants.
Contributions you make for 2023 to a common-law em- ployee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $66,000. Compensation generally doesn't include your contributions to the SEP.
Publication 560 (2023), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
How much of the contribution you can deduct
For 2023, the maximum SEP-IRA contribution you can deduct for any participant is the lesser of two amounts: your actual contributions for that person (including any excess contributions carried over from earlier years), or 25% of the compensation paid to that participant from the plan's business during 2023, up to a cap of $66,000 per participant. In other words, even if 25% of a participant's pay would be higher than $66,000, you cannot deduct more than $66,000 for that person. The compensation counted for the 25% calculation generally does not include the employer's own SEP contributions. This limit applies whether the contribution is for a common-law employee or for the employer himself or herself, though self-employed individuals must use a special computation to work out the deductible amount. The deduction cannot exceed the contribution actually made.
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 $330,000 per participant) paid to the participants during 2023, from the business that has the plan, not to exceed $66,000 per participant.
Publication 560 (2023), 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, you must use a special computation to determine your maximum deduction. Unlike a common-law employee whose compensation is simply his or her wages, a self-employed individual's compensation for SEP purposes is defined as net earnings from self-employment, and that definition already takes into account two deductions: the deductible part of self-employment tax and the contribution to the SEP-IRA itself. Because the deduction for the contribution and the net earnings figure depend on each other, the IRS requires you to figure the deduction indirectly rather than by applying the stated percentage directly to your net profit. The computation ensures that the 25% contribution rate is applied to the correct base - net earnings after the self-employment tax deduction but before the plan contribution deduction - so that the contribution does not itself inflate the compensation it is based on.
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. • The deduction for the deductible part of your self-em- ployment tax. • The deduction for contributions to your own SEP-IRA.
Publication 560 (2023), 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 compensation for SEP purposes is net earnings from self-employment, and because the plan contribution itself is deducted in arriving at that net earnings figure, the stated plan contribution rate cannot be applied directly to the net profit. Instead, the contribution rate must be reduced so that, when applied to the lower base, it produces the same 25% result that would apply for a common-law employee. The IRS provides a Rate Table for Self-Employed and a Rate Worksheet for Self-Employed to perform this adjustment. Once the reduced rate is determined, the maximum deduction is then calculated using the Deduction Worksheet for Self-Employed. This indirect method ensures that the self-employed individual's SEP contribution does not exceed the equivalent of 25% of net earnings after accounting for the deduction for the contribution itself and the deductible part of self-employment tax.
The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. For this rea- son, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan.
Publication 560 (2023), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
Who must be included, and who can be left out
The IRS defines three conditions that an employee must meet before an employer has to include them in a SEP. 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 $750 in compensation from that employer in 2023. An employer is allowed to use eligibility rules that are easier to satisfy than these three - for example, a lower compensation floor or fewer years of service - but may not make the rules harder. Employees who do not meet the tests can be left out of the plan. In addition, certain workers are specifically excludable even if they would otherwise qualify: employees covered by a collective-bargaining agreement that bargained for retirement benefits, and nonresident aliens who received no U.S.-source wages from the employer.
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 $750 in compensation from you in 2023. The amount remains the same for 2023. You can use less restrictive participation require- ments than those listed, but not more restrictive ones.
Publication 560 (2023), 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 does not have to be in place by December 31 of the tax year it is meant to cover. Under federal IRS rules, an employer may establish a SEP for a given year as late as the due date of the income tax return for that year, including any extension the employer has been granted. For a calendar-year sole proprietor whose return is due April 15 with a six-month extension, for example, that means a SEP for 2023 could still be opened as late as October 15, 2024. Once the plan is executed, the employer may still make contributions for the prior year up to that same filing deadline, so long as the SEP agreement itself is signed before the deadline runs out.
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 (2023), 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 is established through a formal written agreement. The IRS offers a model agreement, Form 5305-SEP, that an employer can adopt instead of drafting a custom plan document. When the employer uses this form, no prior IRS approval or determination letter is needed, and the employer generally does not have to file annual retirement-plan information returns with the IRS or the Department of Labor. The completed form is kept by the employer; it is not filed with the IRS. Form 5305-SEP cannot be used, however, if the employer already maintains another qualified retirement plan besides a SEP, has eligible employees for whom SEP-IRAs have not yet been opened, or uses leased employees who are not common-law employees. In those cases a custom written agreement is required.
If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Keep the original form. Don't file it with the IRS. Also, us- ing Form 5305-SEP will usually relieve you from filing an- nual retirement plan information returns with the IRS and the Department of Labor.
Publication 560 (2023), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
A contribution too big to deduct this year carries into next year
When SEP contributions for a year exceed the amount the employer is allowed to deduct, the excess is not lost. The IRS allows the employer to carry over the nondeductible amount and deduct it in later years, subject to that year's own deduction ceiling. Each later year's combined deduction - new contributions plus any amount carried forward - cannot exceed 25% of the participating employees' compensation for that year, and a SEP is treated as a profit-sharing (defined contribution) plan for this purpose. Self-employed individuals must apply an additional reduction to figure the maximum they can deduct for their own contributions. Because the carryover is subject to the same 25% ceiling as fresh contributions, it can take more than one year to use up a large excess. While it is waiting to be deducted, the excess contribution may also be subject to the excise tax described in the next section.
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. However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year.
Publication 560 (2023), Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (IRS)
Contributing more than the deduction limit costs a 10% excise tax
Contributions that exceed the deduction limit for a SEP are treated as nondeductible (excess) contributions, and the IRS imposes a 10% excise tax on them while they remain in the plan. The tax applies each year the excess amount is still undeducted - so it compounds until the employer either deducts the excess in a later year under the carryover rules or withdraws it, if withdrawal is permitted. For 2023, the overall deduction ceiling for a SEP is 25% of each employee's compensation, up to the defined contribution limit of $66,000. Any contribution above that ceiling is excess in the year it is made. Employers should track the excess carefully, because the 10% tax is reported annually on Form 5330 and continues to accrue until the amount is absorbed by a later year's available deduction room or otherwise corrected.
Excise tax. If you made nondeductible (excess) contribu- tions to a SEP, you may be subject to a 10% excise tax.
Publication 560 (2023), 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 2022-55 (IRS)
- Defined contribution limit
The limitation for defined contribution plans under section 415(c)(1)(A) is increased in 2023 from $61,000 to $66,000.
- Compensation threshold
The compensation amount under section 408(k)(2)(C) regarding simplified employee pensions (SEPs) is increased from $650 to $750.
Publication 560 (2023), Retirement Plans for Small Business (IRS)
Contributions you make for 2023 to a common-law em- ployee's SEP-IRA can't exceed the lesser of 25% of the employee's compensation or $66,000.
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.