SEP IRA vs SIMPLE IRA: Choosing the Right Retirement Plan for Your Small Business

The SEP IRA vs SIMPLE IRA choice comes down to who puts the money in. A SEP is funded only by the employer, at a uniform percentage of pay up to $72,000 per person in 2026, and the business can skip a year. A SIMPLE IRA lets employees defer up to $17,000 of their own pay in 2026, and the employer must add a 3% match or a 2% nonelective contribution every year.

That one difference drives the cost. An owner with staff usually pays far less under a SIMPLE, because most of the money comes from employee paychecks. A solo owner or a high-earning owner with few employees often gets more room under a SEP. This guide sets out the 2026 numbers from the IRS, the deadlines, the Roth changes from SECURE 2.0, and a side-by-side example for a three-person company.

How a SEP IRA Works

A Simplified Employee Pension (SEP) is an employer-only plan. Each eligible worker has their own IRA, and the business deposits a percentage of pay into every account. Employees do not make salary deferrals into a SEP.

The IRS describes the core rules on its SEP plan page: a SEP "allows for a contribution of up to 25 percent of each employee's pay," and the "Employer must contribute equally for all eligible employees." If you give yourself 15%, a staff member earning $45,000 receives 15% of $45,000.

Contributions are discretionary. A business can contribute 20% of pay in a profitable year and nothing in a loss year.

Eligibility is set by the plan, within IRS maximums. Per IRS Publication 560, an eligible employee is one who has reached age 21, has worked for you in at least 3 of the last 5 years, and has received at least $750 in compensation in 2025, rising to $800 for 2026. A plan may use less restrictive terms. It may not use stricter ones.

Self-employed owners figure their own contribution on net earnings from self-employment, after the deduction for half of self-employment tax. Publication 560's Rate Table for Self-Employed converts a 25% plan rate into 0.200000, which is why a sole proprietor's maximum works out to 20% of net earnings. S corporation owners use W-2 wages only, so the salary you set under the reasonable compensation rules for S corp owners caps the SEP contribution.

How a SIMPLE IRA Works

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is built for employers with 100 or fewer employees. Employees elect to defer part of their pay, and the employer adds a required contribution on top.

The employer picks one of two formulas each year, per the IRS SIMPLE IRA plan page:

• a dollar-for-dollar match on deferrals up to 3% of the employee's compensation, which the employer may lower to as little as 1% for no more than 2 calendar years in the 5-year period ending with the year of the reduction;
• a 2% nonelective contribution for every eligible employee, whether or not the employee defers.

An employee becomes eligible after earning at least $5,000 in any 2 years before the current year and expecting $5,000 in the current year. The employer must tell employees about the plan before the election period, generally the 60 days before January 1.

The SIMPLE IRA also has an exclusive plan rule. The IRS SIMPLE page states that the "Employer cannot have any other retirement plan." A company that already runs a 401(k) cannot add a SIMPLE IRA in the same year.

SEP IRA vs SIMPLE IRA: 2026 Limits Side by Side

The IRS set the 2026 figures in Notice 2025-67. The SEP cap follows the defined contribution limit, which Notice 2025-67 raises from $70,000 to $72,000. The compensation that can be counted for both plans rises "from $350,000 to $360,000."

The Higher SIMPLE Limits for Small Employers

SECURE 2.0 created a second, higher SIMPLE tier. For 2026 the higher deferral limit is $18,100 and the matching catch-up for ages 50 and over is $3,850. IRS Notice 2024-2 explains who gets it: "The increased limits apply automatically in the case of an eligible employer described in section 408(p)(2)(E)(iv) that has no more than 25 employees who received at least $5,000 of compensation for the preceding calendar year."

Employers with 26 to 100 such employees can opt in, but only by paying more. Under the notice, an electing employer must match deferrals up to "4 percent (increased from 3 percent)" of compensation or make "a nonelective contribution of 3 percent (increased from 2 percent)." The notice also gives a 2-year grace period to an employer that grows past 25 employees.

For SIMPLE participants who turn 60, 61, 62 or 63 in 2026, Notice 2025-67 sets a single $5,250 catch-up and lists no separate figure for the higher tier. The SECURE 2.0 Act guide covers the wider set of changes that law made.

Side-by-Side Example: A Three-Person S Corporation

Take an S corporation with an owner and two employees, all eligible for either plan. The assumptions are:

• Tier: the company had 3 employees who earned at least $5,000 last year, well under 25, so the higher SIMPLE tier ($18,100 deferral, $3,850 catch-up) applies automatically and the employer formula stays at the standard 3% match or 2% nonelective.
• Age: the owner is 52 for all of 2026, so the age 50 catch-up applies and the age 60 to 63 catch-up does not. A SEP has no catch-up at any age.

The three people are:

• Owner, age 52, W-2 wages of $150,000.
• Employee A, age 35, wages of $70,000, would defer 6% under a SIMPLE.
• Employee B, age 28, wages of $45,000, would not defer.

Under a SEP, the owner wants a 15% contribution, so everyone gets 15%. Under a SIMPLE, the owner defers the maximum $18,100 plus the $3,850 catch-up, and the company chooses the 3% match.

Under the SIMPLE, the owner ends up with more in the account ($26,450 against $22,500), and the company spends $6,600 instead of $39,750. The difference comes from the deferral: the owner's $21,950 is salary the owner chose to save, and Employee B's choice not to defer means no match is owed.

If the company chose the 2% nonelective formula instead, it would pay $3,000 for the owner, $1,400 for Employee A and $900 for Employee B, a total of $5,300.

The SEP only pulls ahead for the owner at higher rates. At 25%, the owner gets $37,500, and the two employees get $28,750 between them. That trade works when there are no employees, or when the owner sees the staff contribution as part of pay.

If the owner were 61 instead of 52, the SIMPLE deferral room would be $18,100 plus $5,250, or $23,350.

Deadlines and the 2-Year Rule

A SEP can be set up after the year ends. Publication 560 states: "You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year." Contributions follow the same deadline. An S corporation on extension can open and fund a 2026 SEP as late as September 15, 2027, which makes the SEP a useful year-end fix once profit is known.

A SIMPLE IRA has to be in place during the year. The IRS SIMPLE page says: "You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year." A new employer that comes into existence after October 1 can set one up as soon as administratively feasible. Employer matching and nonelective contributions are due by the return due date, including extensions. Deferral deadlines belong on the payroll compliance checklist, since deferrals come out of each paycheck.

The SIMPLE also carries a 2-year rule. Money can move tax-free to a non-SIMPLE IRA only "after 2 years of participation in the SIMPLE IRA plan." An early withdrawal in that window faces a heavier penalty: the IRS says "the 10% tax is increased to 25%." That additional tax is reported on Form 5329 for additional taxes on retirement accounts. A SEP has no matching 2-year restriction.

Roth Options After SECURE 2.0

Both plans can now hold Roth money. Notice 2024-2 explains that Section 601 of SECURE 2.0 permits "an employee who participates in a SIMPLE IRA plan or simplified employee pension (SEP) arrangement to designate a Roth IRA as the IRA to which contributions under the plan or arrangement are made." Roth contributions are taxed now and can come out tax-free later if the Roth rules are met.

The employer decides whether to offer this. The IRS SEP page tells employers, "You may choose to accept Roth contributions, but are not required to." Check that your IRA provider supports Roth SEP or SIMPLE accounts before offering them. The IRS SIMPLE IRA plan page still says a SIMPLE IRA cannot be a Roth IRA, which predates the SECURE 2.0 change described in Notice 2024-2.

The new mandatory Roth catch-up rule for high earners does not reach these plans. Notice 2025-67 applies the $150,000 wage threshold only to plans "other than a plan described in section 408(k) or (p)," which are the SEP and SIMPLE IRA sections. Our guide to mandatory Roth catch-up contributions in 2026 covers how the rule works in 401(k) plans.

Startup Tax Credits for a New SEP or SIMPLE

The small employer pension startup credit in Code section 45E, as expanded by SECURE 2.0, covers both plans. According to the IRS startup costs credit page, an employer with 100 or fewer employees earning at least $5,000 can claim the credit for three years, and at least one non-highly compensated employee must participate.

• For employers with 50 or fewer such employees, the credit covers 100% of eligible startup costs; for 51 to 100 employees, it covers 50%.
• The yearly cap is the greater of $500 or the lesser of $250 per eligible non-highly compensated employee or $5,000.

A separate employer contribution credit applies to SEP and SIMPLE IRA plans, capped at $1,000 per participant. The rate is 100% in the first two plan years, then 75%, 50% and 25% in years three through five, with a reduction for employers that have more than 50 employees. Contributions for an employee whose wages exceed an indexed threshold do not count; the December 2025 Form 8881 instructions set it at $105,000.

In the example above, Employees A and B would each qualify for up to $1,000 of contribution credit under the SEP, and Employee A would qualify under the SIMPLE match. Both credits are claimed in Part I of Form 8881, and costs claimed as a credit cannot also be deducted.

Which Plan Fits Your Business

The comparison usually resolves on four facts: whether you have employees, how much the owner wants to save, how steady profits are, and how close the calendar is to October 1.

A SEP tends to fit when:

• you are self-employed with no staff, and a Roth solo 401(k) is more administration than you want;
• profits swing from year to year and you want the option to contribute nothing;
• it is already past October 1 and you still want a deduction for the current year.

A SIMPLE IRA tends to fit when:

• you have employees and want them to save their own money;
• you want a predictable, modest employer cost, usually 2% or 3% of payroll;
• you are willing to set the plan up by October 1 and keep it as your only plan.

Owners who outgrow both plans, or who want profit sharing on top of deferrals, usually move to a 401(k). Accountants weighing these choices for their own practice can see the CPA retirement planning guide for how plan choice fits into a personal tax plan. Contribution deadlines also belong on your small business tax compliance calendar.

This article is general information as of October 2026. Limits change each year, so confirm current figures with the IRS before you finalize a plan.

Frequently Asked Questions

What is the main difference between a SEP IRA and a SIMPLE IRA? A SEP is funded only by the employer, at the same percentage of pay for every eligible employee. A SIMPLE IRA is funded mainly by employee salary deferrals, with a required employer match of up to 3% or a 2% nonelective contribution.

What are the 2026 contribution limits for SEP and SIMPLE IRAs? A SEP allows up to 25% of compensation, capped at $72,000, with compensation counted up to $360,000. A SIMPLE IRA allows a $17,000 deferral ($18,100 at qualifying small employers), a $4,000 catch-up at 50 or older ($3,850 in the higher tier) and a $5,250 catch-up at ages 60 to 63, plus the employer contribution.

Can I open a SEP IRA after the year ends? Yes. A SEP can be set up and funded as late as the due date of the business tax return, including extensions. A SIMPLE IRA generally has to be set up by October 1 of the year it covers.

Can I move money out of a SIMPLE IRA right away? Not tax-free to a regular IRA. During the first 2 years of participation, money can only move to another SIMPLE IRA without tax, and early withdrawals in that period face a 25% additional tax instead of 10%.

Can SEP and SIMPLE IRA contributions be Roth? Yes, if the employer allows it and the IRA provider supports it. SECURE 2.0 Section 601 lets employees designate a Roth IRA to receive SEP or SIMPLE contributions, which are then taxable in the year made.

Next Step

Madras Accountancy supports US CPA firms and their business clients with bookkeeping, payroll coordination and tax preparation, including retirement plan contribution tracking and year-end deduction work. To talk through a SEP or SIMPLE IRA setup for a client, contact our team.