SEP IRA for S-Corp Owners (2026): Contribution Limits and When a Solo 401(k) Wins

Picture a graphic designer who runs her studio through an S-Corp, pays herself a $90,000 W-2 salary, and shows up at her accountant's office in August wanting to shelter last year's profit from tax. She never opened a 401(k), and the calendar year is long gone. One retirement door is still open, and it is the SEP IRA. The designer here is theoretical, not an actual EntityIQ client, but the situation is common enough that I see some version of it every extension season. The catch is how little it may let her put away compared to what she could have if she had planned ahead.

What a SEP IRA is

A Simplified Employee Pension, governed by IRC §408(k), is an employer-funded retirement account. The business makes the contribution, deposits it into an IRA in the owner's name, and deducts it. There is no separate plan document to draft and no annual Form 5500 to file for a one-person plan. You adopt it by signing IRS Form 5305-SEP and opening the IRA at a custodian. That simplicity is the entire appeal.

The trade for that simplicity is that a SEP has only one lever. The employer contributes, and the employee never does. There are no elective salary deferrals and no age-50 catch-up contributions in a SEP, which is the feature that separates it from a Solo 401(k) and, as you will see, usually leaves money on the table for a solo owner.

The one number that caps an S-Corp SEP

For a shareholder-employee of an S corporation, only your W-2 wages count as compensation for a SEP. Distributions and pass-through profit on your K-1 are not compensation, so they cannot raise your contribution ceiling. This trips people up constantly. An owner who takes a $50,000 salary and $150,000 in distributions has $50,000 of SEP compensation, not $200,000. The IRS says as much for S-Corp owners: the plan looks to your wages, not your profit.

The contribution itself is the lesser of 25% of that W-2 compensation or the annual dollar limit under IRC §415(c). For 2026, the IRS set that dollar limit at $72,000 in Notice 2025-67. So for 2026 an S-Corp can contribute up to 25% of your W-2 wages to your SEP IRA, capped at $72,000. Because the limit is a flat 25% with no employee deferral, you need $288,000 of W-2 wages to reach the full $72,000. A separate compensation cap under IRC §401(a)(17), $360,000 for 2026, sets the most wages the 25% can be applied to, but the $72,000 dollar limit binds first for anyone using a straight SEP.

SEP versus Solo 401(k): the salary that separates them

Here is where the SEP quietly costs a solo owner. A Solo 401(k) uses the same 25% employer contribution, but it adds an employee elective deferral on top, which the IRS set at $24,500 for 2026. That deferral does not depend on the 25% math, so it is money a SEP simply cannot reach. Both plans stop at the same $72,000 ceiling, but the Solo 401(k) climbs to it far faster. The table below assumes no other retirement plan and an owner under age 50.

For a solo owner with no employees, a Solo 401(k) usually shelters more, because it adds a $24,500 employee deferral on top of the same 25% employer contribution. The SEP only catches up at $288,000 of wages, where both hit the $72,000 ceiling. The SEP wins mainly on flexibility, since you can open and fund it after year-end. If you are over 50, the gap is even wider, because a Solo 401(k) also allows an $8,000 catch-up in 2026, and a $11,250 catch-up for those ages 60 through 63 under the SECURE 2.0 rules. A SEP allows neither.

Where the SEP actually wins

The SEP's advantage is timing. You can set up and fund a SEP as late as the due date of the S corporation return, including extensions. For a calendar-year S-Corp that is March 15, or September 15 if you extend, which lets you fund last year after the year has already closed. That rule comes from IRC §404(h)(1)(B). A Solo 401(k) is less forgiving for the deferral piece, because the employee salary deferral generally has to be elected while you are still drawing a paycheck during the year. So the designer from the top of this article, sitting in an August meeting for a year that already ended, may have no choice but the SEP. That is the plan's real job. It rescues owners who did not plan ahead.

The employee trap

If your S-Corp has staff, the SEP changes character fast. A SEP must contribute the same percentage of compensation for every eligible employee that it contributes for the owner. Eligible generally means anyone age 21 or older who worked for you in three of the last five years and earned at least $800 in 2026, the threshold set under IRC §408(k)(2)(C). So an owner who wants to put 25% away for themselves has to put 25% away for the receptionist and the two part-timers too. For a business with employees, a 401(k) with its own vesting and matching rules is often the cheaper way to favor the owner. The SEP shines when the only eligible employee is you.

How the deduction and the payroll math work

A SEP contribution is an employer contribution deducted on Form 1120-S, so it lowers the profit that passes through to your return, but it does not reduce the FICA on your W-2 wages. It is an income tax deferral, not a payroll tax cut. Do not confuse it with the payroll-tax savings of the S-Corp election itself, which come from paying distributions instead of wages. The SEP saves income tax now by pushing it into retirement, and the contribution is not added to your W-2, so it does not raise your Social Security or Medicare tax. One more point worth knowing: SECURE 2.0 added a Roth SEP option, so a custodian that supports it will let you treat the contribution as Roth and skip the deduction if you would rather pay the tax now.

A practical rule

If you are a solo S-Corp owner planning ahead, open a Solo 401(k) and use the deferral. If you are staring at a closed tax year and never set up a plan, the SEP is your friend, and it can still shelter a real amount if your salary is high. If you have employees, price out both before you commit, because the SEP's equal-percentage rule can get expensive. And remember that your W-2 salary is the ceiling on all of it, so the reasonable compensation you set for the election also sets how much you can save for retirement.

Your salary is the hinge for both the payroll-tax savings and the retirement contribution, so it is worth modeling before you file. Run your numbers through the EntityIQ S-Corp tax calculator to see how a given salary affects your savings, then compare plans with our Solo 401(k) for S-Corp owners guide. For the salary itself, see S-Corp reasonable compensation.

This article is educational and is not legal or tax advice. The numbers above are 2026 figures, and the owner is theoretical. Please consult a qualified CPA before choosing or funding a retirement plan.