April 18, 2024

Due Dates & Limits for SEP IRA Contributions (2024)

Contents

The SEP IRA is a popular–and effective–retirement savings strategy for self-employed individuals and small business owners. Before contributing to a SEP IRA, you should first understand key details such as contribution deadlines, limits, and other important points. This article will explain the SEP IRA fundamentals to help you maximize retirement savings and stay compliant with the IRS.

SEP IRA Contribution Due Dates

Your business can make contributions to a SEP IRA until the original filing deadline for its tax return. The original filing deadlines depend on your business’ entity type.

SEP IRA contribution deadlines by entity type:

  • Partnerships (Form 1065): March 15th, 2024
  • S Corporations (Form 1120-S): March 15th, 2024
  • Corporations (Form 1120): April 15th, 2024
  • Self-Employed Individuals (Schedule C): April 15th, 2024

Self-employed individuals file Schedule C with their personal income tax return.  

What is the SEP IRA contribution due date for extended tax returns?

If your business extends the original filing due date for its tax return, then the deadline to make SEP IRA contributions is also extended. Extending the tax return is a good idea if you need more time to make a SEP IRA contribution.

Extension SEP IRA contribution deadlines by entity type:

  • Partnerships (Form 1065): September 16th, 2024
  • S Corporations (Form 1120-S): September 16th, 2024
  • Corporations (Form 1120): October 15th, 2024
  • Self-Employed Individuals (Schedule C): October 15th, 2024

Be aware that extending a tax return doesn’t extend the tax payment deadline. As an individual, you’ll still need to pay your tax liability on or before your original tax return due date, even if your business is a partnership or S corporation.

What happens if the SEP IRA contribution due date is missed?

Failing to make a SEP IRA contribution before your tax return’s due date will result in the contribution being ineligible for a deduction. It will need to be taken on the following year’s tax return.

To help the IRS track SEP IRA contributions, the SEP IRA administrator files Form 5498 with the IRS annually. Form 5498 reports SEP IRA contributions made within the calendar year only. Contributions occurring after December 31st would be reported on next year's Form 5498. Next year's Form 5498 would include the SEP IRA contribution reported on this year's tax return and any contributions made next year.

SEP IRA Contribution Limits

For 2024, the maximum amount that a business can contribute to a SEP IRA for each employee is the lesser of:

  • $69,000 ($66,000 for 2023 contributions); or
  • 25% of employee compensation.

This limit is significantly higher than the contribution limit for a regular IRA, which is $7,000 for 2023 ($6,500 for 2022). Individuals older than 50 can contribute up to $8,000 for 2023 ($7,500 for 2022). 

The relatively high contribution limits make the SEP IRA an attractive choice for small business owners and self-employed individuals who want to save for retirement.

Bear in mind that contribution rates must be the same for all employees. If you’re contributing 25% of compensation for yourself, then you’d need to also contribute 25% of compensation to all other eligible employees.

SEP IRA contribution limit for self-employed individuals

Self-employed individuals calculate their maximum annual contribution using a special formula. This calculation is based on your net self-employed income after deducting the SEP IRA contribution and 50% of self-employment taxes.

As a self-employed individual (i.e. someone who files Schedule C), you can calculate your maximum SEP IRA contribution using the tables and worksheets in IRS Pub. 560.

First, determine the SEP IRA contribution rate, as a percentage of compensation, you’d like to contribute for yourself and all employees, if you have any. The rates must be the same for everyone.

Then find the applicable rate in column B of the ‘Rate Table for Self-Employed’ in Pub. 560 and complete the ‘Deduction Worksheet for Self-Employed.’ The result is your maximum SEP IRA contribution for the year.

In short, if you intend to make the maximum contribution as a self-employed individual, your contribution equals 20 percent of net self-employment income after deducting 50% of self-employment taxes and the entire SEP IRA contribution.

Your tax preparer can help calculate your maximum SEP IRA contribution prior to filing your tax returns.

The SEP IRA - How It Works

A SEP IRA, or "Simplified Employee Pension" IRA, is a retirement savings plan for self-employed individuals and small businesses. Self-employed individuals contribute to their own SEP IRA whereas businesses must set up and contribute to individual SEP IRAs on behalf of their employees.

Contributions can be made up to the annual limit set by the IRS (see section above). 

If the employee ever leaves their employer, then the employee can rollover the SEP IRA contributions and earnings into another retirement account. Rollovers would be tax-free unless they’re rolled over into a Roth plan.

Are SEP IRA contributions tax-deferred?

SEP IRA contributions from your business to you and your employees are tax-deferred income. Tax-deferred means that the contributions your business makes aren’t taxable compensation to employees, including yourself, in the year that the contribution was made. 

SEP IRA contributions are taxable only when the employee withdraws the contribution. Earnings from a SEP IRA contribution accumulate tax-free within the employee’s account. When the employee withdraws the contribution and earnings in retirement, the employee will be taxed on the withdrawal.

Are SEP IRA contributions tax-deductible?

Contributions to a SEP IRA are deductible by the business. The deduction reduces taxable income which means you, the business owner, will pay less tax on your business income. 

The contributing business can either deduct a SEP IRA contribution for the year it was deposited into SEP IRA accounts or the year for which the contribution was calculated.

For example, if your business contributes to a SEP IRA plan in January 2025, the contribution would be deductible for tax year 2024 or 2025 regardless of the business’ accounting method.

By making a SEP IRA contribution for yourself, you defer taxes on business income to a future year by shifting that income into a SEP IRA. When you withdraw the income during retirement it becomes taxable.

SEP IRA Disadvantages

The primary disadvantage of a SEP IRA is that contributions can’t be made on an after-tax basis. This means that contributions are taxable when withdrawn by the employee in retirement or before retirement.

To get around this disadvantage, the SEP IRA account holder can complete a Roth conversion from a SEP IRA. This involves transferring funds from the SEP IRA into a Roth IRA, creating a taxable distribution in the year of the conversion.

If you’re self-employed, and your business has no employees, you can also contribute to a Solo 401(k). A Solo 401(k) offers Traditional (i.e. pre-tax) and Roth (i.e. after-tax) contribution options.

The ability to make after-tax contributions often makes the Solo 401(k) a more attractive choice for self-employed individuals, since the contributions and earnings within a Roth account accumulate tax-free until retirement, when they can also be withdrawn tax-free.

The downside to the Solo 401(k) is that once your business hires its first employee, you can no longer contribute to a Solo 401(k). Instead, you’d need to contribute to a Simple IRA or a Roth IRA in order to make after-tax contributions to a retirement account.

Roth IRAs are established by you, as an individual, and you’d make contributions from your personal accounts. These contributions are reported on your personal tax return and would be entirely separate from your business finances.

SIMPLE IRAs are established by your business and contributions are made by both your employees and your business. Your business would report employee contributions on Form W-2 for each participating employee. Contributions made by your business would be reported on the business tax return.

The annual contribution limits for both Simple IRAs and Roth IRAs are lower than the SEP IRA annual contribution limits. So the optimal choice in any given year generally boils down to how much in after-tax contributions you’d like to make and whether or not you have employees.

Need help with your SEP IRA contribution?

Get in touch using the button below to speak to a CPA who can help you make a SEP IRA contribution before the contribution due dates.

FAQs

Are part-time employees eligible for SEP IRA contributions?

Yes, part-time employees are eligible for SEP IRA contributions if they’ve met each of the following requirements:

  • Has reached age 21;
  • Has worked for you in at least 3 of the last 5 years;
  • Has received at lease $750 in compensation from you in 2024;

Where are SEP IRA contributions reported?

The form on which SEP IRA contributions are reported depends on your business’ entity type. 

Self-Employed Individuals

  • Report contributions to employee SEP accounts on Form 1040, Schedule C, Line 19.
  • Report contributions to your SEP account on Form 1040, Schedule 1, Line 16.
  • Form 1040 is your personal tax return.

S Corporations

  • Form 1120-S, Line 17 (Pension, Profit-Sharing, etc., Plans).
  • Contributions aren’t reported on Schedule K-1 or the employee’s W-2.

Partnerships

  • Form 1065, Line 18 (Pension, Profit-Sharing, etc., Plans).
  • Contributions aren’t reported on Schedule K-1 or the employee’s W-2.

What is the disadvantage of contributing to a SEP IRA?

The primary disadvantage of a SEP IRA is that contributions are considered pre-tax. This means that employees will pay tax on the contributions and earnings when they withdraw the contributions. Employees can convert the SEP IRA to another retirement plan, which might allow them to pay tax on the contributions now and avoid taxes on distributions when they retire.

Can employees contribute to a SEP IRA?

No, employees aren’t eligible to contribute to a SEP IRA. Contributions to a SEP IRA can only be made by an employer. Consider the SIMPLE IRA if you’d like to allow employee contributions to an IRA account. Employee contributions must be made from payroll deductions.

Can a SEP IRA be converted to a Roth IRA?

Yes, a SEP IRA can be converted to a Roth IRA. The conversion creates a taxable event in the year of the conversion, but the conversion doesn’t count as an early distribution subject and isn’t subject to the 10% penalty on early distributions.

Does a SEP IRA reduce taxable income?

Yes, contributions to a SEP IRA by an employer on behalf of its employees reduce the employer’s taxable income. The employer takes a deduction on its income tax return, which reduces taxable income for the employer.

The employee’s taxable income isn’t impacted by the contribution until the employee withdraws the contribution, whether in retirement or before retirement. SEP contributions that the employee withdraws before retirement are subject to a penalty in addition to income taxes.

This content is for informational purposes only and does not constitute legal, business, or tax advice. You should consult your own attorney, business advisor, or tax advisor regarding matters mentioned in this post. We take no responsibility for actions taken based on the information provided.

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