If you’re a business owner or self-employed professional and haven’t yet put a retirement plan in place, there’s still an opportunity to reduce your 2025 tax liability. By establishing a Simplified Employee Pension (SEP) before filing your 2025 tax return, you may be able to make deductible contributions that directly lower your taxable income.
SEPs remain a popular option for small business owners because they are flexible, relatively easy to establish, and allow for substantial contributions. Even better, the deadline to set up and fund a SEP extends into 2026 for the 2025 tax year, giving you extra time for strategic planning.
SEP Deadlines That Work in Your Favor
Unlike many retirement plans that must be established by year-end, a SEP can be set up as late as the due date of your business’s 2025 income tax return, including extensions.
- Calendar-year partnerships and S corporations: March 16, 2026, or September 15, 2026, with an extension
- Calendar-year sole proprietors and C corporations: April 15, 2026, or October 15, 2026, with an extension
- LLCs: Deadlines depend on how the LLC is taxed (sole proprietor, partnership, S corporation, or C corporation)
As long as the SEP is established and funded by the applicable deadline, contributions can still be deducted on your 2025 tax return.
Simple Setup With Minimal Administration
Setting up a SEP is straightforward. The plan is created by completing Form 5305-SEP, a short agreement that outlines the terms of the plan. This form is not filed with the IRS but should be retained with your permanent business records.
If you have eligible employees, you are required to provide them with a copy of the SEP agreement and a disclosure statement explaining how the plan works.
Contributions are made to SEP-IRAs for you and each eligible employee. All SEP contributions are immediately 100% vested. Employer contributions made on behalf of employees are not included in their taxable income when contributed, though distributions taken later in retirement are taxable.
Flexible Contributions With Generous Limits
One of the most appealing features of a SEP is flexibility. Contributions are discretionary, meaning you can decide each year whether to contribute and how much to contribute based on your business’s cash flow.
However, if you have employees, the same contribution percentage must be applied to all eligible participants, including yourself.
For the 2025 tax year, SEP contribution limits are:
- Up to 25% of compensation (approximately 20% of net self-employment income)
- Compensation capped at $350,000
- Maximum contribution of $70,000
For 2026, the compensation cap increases to $360,000, and the maximum contribution rises to $72,000.
Is a SEP the Right Retirement Strategy for You?
While SEPs are simpler than many other retirement plans, they aren’t the best solution for every business. Factors such as employee count, income level, and long-term retirement goals all play a role in determining whether a SEP or another plan may be more effective.
At Botwinick & Co., we help business owners evaluate retirement plan options as part of a broader tax strategy. With proper planning, a SEP can be a powerful tool for both retirement savings and tax reduction.
Frequently Asked Questions
Question: Can I still set up a SEP in 2026 and deduct contributions for 2025?
Answer: Yes. A SEP can be established and funded as late as your 2025 tax return filing deadline, including extensions, and still qualify for a 2025 deduction.
Question: Do I have to contribute every year to a SEP?
Answer: No. SEP contributions are discretionary, allowing you to adjust contributions based on your business’s profitability each year.
Question: Am I required to include employees in my SEP?
Answer: In most cases, yes. If employees meet eligibility requirements, contributions must be made for them using the same percentage of compensation as the owner.
Question: How are SEP contributions taxed?
Answer: Employer contributions are tax-deductible for the business and not taxable to employees when contributed. Distributions taken in retirement are taxed as ordinary income.
Question: Should I choose a SEP or another retirement plan?
Answer: That depends on your business structure, income, and goals. A tax professional can help you compare SEPs with other retirement plans to determine the best fit.
