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Ext. PublicationMaking SEP-IRAs Work: A Practical Guide for S Corporations
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Simplified employee pension (SEP) individual retirement accounts (IRAs) offer a powerful retirement savings option for small businesses, including S corporations (S corps). Designed with simplicity and tax efficiency in mind, SEP-IRAs can be a strategic benefit for both employers and employees. If you’re an S corp owner, manager or advisor weighing retirement plan options, there are a few important things to keep in mind about this flexible retirement vehicle.
What is a SEP-IRA?
A SEP-IRA is a type of retirement plan that allows employers to make contributions to traditional IRAs set up for employees. These plans are easy to establish, require minimal paperwork and offer generous contribution limits. They are especially popular with small business owners and self-employed individuals. In addition to being easy to set up and maintain, SEP-IRAs offer advantages that may be appealing to small businesses and S corps.
Key benefits of SEP-IRAs:
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- High contribution limits (up to $69,000 in 2025)
- Contributions are tax-deductible for the business
- Immediate vesting of all employer contributions
- Flexible annual funding — contributions are not required every year
- Easy to administer with no annual IRS filings
How SEP-IRAs Work in an S Corporation
For S corps, SEP-IRA contributions are based exclusively on W-2 wages paid to employees, including owners. Distributions or shareholder draws don’t count toward SEP calculations. This means S corp owners must pay themselves a reasonable salary to make SEP contributions for themselves.
Additionally, the employer must contribute the same percentage of salary for all eligible employees. For example, if you contribute 20% of your own salary to your SEP-IRA, you must contribute 20% of each eligible employee’s W-2 salary as well.
Eligibility Rules
Before setting up a SEP-IRA, it’s important to understand who qualifies to receive contributions. The IRS outlines specific requirements for employee eligibility. Employees are eligible if they:
- Are at least 21 years old
- Have worked for the company in at least three of the last five years
- Earn at least $750 in 2025
Tax Implications
Contributions to a SEP-IRA are not included in an employee’s taxable income and are not subject to the Federal Insurance Contributions Act (FICA), Medicare or Federal Unemployment Tax Act (FUTA) taxes. For the S corp, these contributions are a deductible business expense, lowering overall taxable income.
Example for clarity
Imagine an S corp owner named Sarah pays herself a W-2 salary of $120,000. She decides to contribute 25% of her salary to a SEP-IRA. That’s a $30,000 contribution, fully deductible by the business. If she has two employees who meet the eligibility rules for participation in the plan, earning $50,000 each, she must also contribute 25% of their salaries, or $12,500 each, to their SEP-IRAs. This illustrates the uniformity rule and the potential costs if employees are involved.
SEP-IRA vs. Other Retirement Plans
While SEP-IRAs are simpler and offer higher contribution limits than traditional IRAs, they do not allow employee deferrals or Roth contributions. Business owners seeking more flexibility, especially solo owners, might consider a solo 401(k) which permits both employee and employer contributions.
Who Should Consider a SEP-IRA?
Choosing a retirement plan depends on your business structure, goals and team size. A SEP-IRA may be a smart choice for the following scenarios:
- Sole proprietors or S corp owners with no or few employees
- Businesses looking for an easy, cost-effective retirement plan
- Employers wanting a flexible contribution structure
Key Takeaways
SEP-IRAs are a valuable retirement planning tool for S corp owners looking to reduce taxable income while saving for the future. They offer simplicity, flexibility and powerful tax advantages. If you’re exploring retirement plan options for your business, a SEP-IRA could be a smart and strategic choice.
Are you considering a SEP-IRA for your S corporation? Contact us to start the conversation. Weaver’s professionals can help assess your options and determine the best retirement plan for your goals.
Authored by Tadeh Papelian and Kolette LeBlanc
©2025
