How SEP IRA Equal Percentage Contributions Work

Running a business often means balancing retirement savings for yourself with benefits for your team. A SEP IRA can be a powerful option, but it comes with specific contribution rules every employer should understand.

Only the employer can fund a SEP IRA—employees cannot make their own contributions. When you contribute for yourself, you must also contribute the same percentage of pay for every eligible employee.

By the end of this article, you’ll understand how equal percentage contributions work, who qualifies as an eligible employee, and what flexibility you have when deciding how much to contribute each year.

What Is the Equal Percentage Contribution Rule?

A SEP IRA follows a strict rule: every eligible employee must receive the same percentage contribution as the employer.

Employers may contribute up to 25% of compensation, capped by the annual-defined contribution limit of $70,000 for 2025. If you decide to contribute a percentage of your own pay into your SEP IRA, you must also contribute that exact percentage of pay for each eligible employee.

✏️ Hypothetical Example: 

If you contribute 10% of your compensation this year, you must also contribute 10% of every eligible employee’s compensation to their SEP IRA.

Employees cannot add their own money to a SEP IRA. Only the employer contributes. However, employees still own their accounts, direct the investments, and all employer contributions are immediately 100% vested.

Who Is Considered an Eligible Employee?

To qualify as an eligible employee under a SEP IRA, a worker must meet all of the following:

✅ Be at least age 21
✅ Have worked for your business in at least three of the past five years
✅ Earned at least $750 in 2025 (including bonuses and commissions)

When you establish a SEP IRA, you must also set up accounts for every eligible employee. Each employee has full ownership and control of their account. They decide how to invest their funds and may withdraw or roll over the account into another retirement plan, subject to standard IRA rollover rules.

✏️ Hypothetical Example: 

Suppose an employee at your company also runs a small side business. If that side business has no full-time employees, the employee could open a Solo 401k. A Solo 401k may offer additional features such as Roth contributions and, if the plan allows, participant loans. 

Both SEP IRAs and 401k plans can hold a wide range of IRS-permitted investments. However, collectibles and certain prohibited transactions with disqualified persons are not allowed.

Why SEP IRAs Work Best for Businesses With Few Employees

The equal percentage contribution rule makes SEP IRAs more practical for business owners with a small team. You can have as many employees as you like, but costs can add up quickly if you must fund contributions for dozens or even hundreds of workers.

One major advantage is flexibility. Employers are not required to make contributions every year. In a slow year, you can reduce or skip contributions entirely. By comparison, a SIMPLE IRA requires an employer contribution each year, either through a match of up to 3% or a 2% nonelective contribution for all eligible employees.

Contribution Percentages Must Be the Same for Everyone

All SEP IRA contributions must follow the same percentage rule. You cannot set different contribution rates for yourself or adjust percentages based on an employee’s role or performance.

For example, if you decide to contribute 10% of your compensation, you must also contribute 10% of each eligible employee’s pay—no exceptions. The percentage cannot vary between employees.

If contributions are not made uniformly, corrections are required. The IRS provides a SEP Fix-It Guide with step-by-step instructions on how to resolve mistakes.

What If I Have Zero Employees?

If your business has no employees, you don’t need to worry about making equal percentage contributions. You can contribute only to your own SEP IRA.

However, being a one-person business also means you could qualify for a Solo 401k. A Solo 401k can allow employee salary deferrals in addition to employer contributions, which may boost your total contribution limits. Many plans also include a Roth option, something a SEP IRA does not provide.

A Solo 401k can also include features like:

✅ The option to take a loan, if the plan permits

✅ Direct account control (sometimes called “checkbook control”) through a plan-titled bank or brokerage account. This feature is based on the provider’s setup, not IRS rules.

📌 Setting up a Solo 401k can be more complex than opening a SEP IRA. That said, modern platforms such as The Carry Solo 401k highlight simplified onboarding and integrated bank or brokerage accounts built into the plan.

Key Takeaways

A SEP IRA can be a practical option for business owners who want a straightforward way to save for retirement. It typically works best for those with few or no employees, since contributions must follow equal percentage rules across all eligible workers.

If you run your business alone, a Solo 401k may be worth exploring because it can allow both salary deferrals and Roth contributions. The tradeoff is that it often requires more setup and administration than a SEP.

The right choice depends on your business structure, long-term savings goals, and the degree of flexibility you want in your plan. Compare contribution limits, tax features, and administrative requirements to determine which plan best fits your situation.

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