A SEP-IRA (Simplified Employee Pension) allows contributions of up to 25% of net self-employment income, with a maximum of $69,000 in 2024. Contributions are fully deductible and can be made up to the tax filing deadline (including extensions). SEP-IRAs are simpler to set up than Solo 401(k)s but do not allow employee contributions.
Getting the deduction right is not just about whether it is allowed — it is about how you set it up.
You must have self-employment income. SEP-IRAs work for sole proprietors, single-member LLCs, and S-Corp owners.
Keep contribution records and account statements.
Open a SEP-IRA at a brokerage. Contribute up to 25% of net SE income by your tax filing deadline (including extensions). Report on Schedule 1.
Do not exceed 25% of net SE income. If you have employees, you must contribute the same percentage for all eligible employees.
SEP-IRA contributions can be made up to October 15 (with extension) -- useful for last-minute tax planning. Compare with Solo 401(k) -- the Solo 401(k) often allows larger contributions.
When structured correctly, this deduction can significantly reduce your taxable income.
Here is how this deduction typically works in real situations:
A freelancer earns $200,000 net and contributes 25% to a SEP-IRA.
An S-Corp owner contributes to a SEP-IRA based on their W-2 wages from the corporation.
A business owner with employees contributes to a SEP-IRA but does not contribute for eligible employees.
Key Takeaway: The difference between a valid deduction and a denied one usually comes down to documentation, usage percentage, and proper structuring. The same expense can be fully deductible, partially deductible, or not deductible at all — depending on how it is handled.
Up to 25% of net self-employment income, with a maximum of $69,000 in 2024.
The Solo 401(k) typically allows larger contributions at lower income levels due to the employee contribution component. The SEP-IRA is simpler to set up and administer.
