SEP IRA for S Corp Owners: How Contributions Are Calculated

A sole proprietor with $200,000 of profit and an S corporation owner with $200,000 of profit do not get the same SEP contribution. The proprietor computes it on net earnings; the S corporation owner computes it on W-2 wages alone, and most owners pay themselves a salary well below the profit. That single difference decides everything else on this page: the formula, the ceiling, the trade against payroll tax, and how the SEP compares with a solo 401(k) or SIMPLE IRA. The plan comparison across all business types is in retirement plans for business owners; the glossary entry is at SEP IRA.

W-2 wages are the only base: distributions count for nothing

A SEP is an employer plan, and the S corporation is the employer. Its contribution for the owner is excluded from the owner's income up to the lesser of “25 percent of the compensation ... from such employer includible in the employee's gross income for the year” or the section 415(c) limit (IRC 402(h)(2)), which is $72,000 for 2026, with compensation counted up to $360,000 (Notice 2025-67). The corporation deducts up to 25% of the compensation paid to participants (IRC 404(h)(1)(C)). Compensation means the wages on the owner's Form W-2. The shareholder distributions reported on Schedule K-1 are not compensation: “Distributions you receive as a shareholder of an S corporation do not constitute earned income for retirement plan purposes” (IRS, retirement plan FAQs regarding contributions, S corporation). An owner who takes $40,000 of salary and $160,000 of distributions has $10,000 of SEP room, not $50,000.

The same percentage for every eligible employee

The owner cannot take 25% and give the staff 3%. SEP contributions are discriminatory “unless contributions thereto bear a uniform relationship to the compensation” of each participating employee (IRC 408(k)(3)(C)), and the IRS model Form 5305-SEP requires allocations proportional to pay (IRS, SEP FAQs). The plan must cover every employee who has reached age 21, performed service for the employer in at least 3 of the immediately preceding 5 years, and received at least $800 of compensation for 2026 (IRC 408(k)(2); Notice 2025-67, which raised the amount from $750). Those are ceilings on how restrictive the plan may be, not floors; Publication 560 says an employer may use less restrictive terms but not more (Publication 560). Union employees whose retirement benefits were bargained for, and nonresident aliens with no U.S. source pay, may be excluded. The cost of the owner's own contribution is therefore the same percentage applied to the whole eligible payroll, which is the number to compute before choosing the rate for the year.

How the owner's salary sets the room, and what it costs in payroll tax

Because the base is W-2 pay, the salary decision and the SEP decision are the same decision. The salary has to be reasonable first: the IRS requires an S corporation to pay reasonable compensation to a shareholder-employee for services before non-wage distributions are made (IRS, S corporation compensation and medical insurance issues), and the factors are in S corp reasonable salary. Above that floor, each extra dollar of salary buys 25 cents of SEP room and costs payroll tax: 12.4% Social Security tax on wages up to the $184,500 wage base for 2026 and 2.9% Medicare tax on all wages, employer and employee halves combined (IRC 1401 rates; Publication 15). Raising the owner's wages from $100,000 to $200,000 adds $25,000 of contribution room and $13,378 of Social Security and Medicare tax, half of it a deductible corporate expense. The comparison is not one-sided: the SEP dollars are deducted by the corporation and grow untaxed, and the extra wages also earn Social Security credits. Because the wages, the withholding and the contribution all run through payroll, the numbers have to agree at year end; Managed Payroll runs owner payroll from $25 per employee per month.

Deadlines: set up and fund by the return due date, extensions included

A SEP is the most forgiving plan on the calendar. The IRS says you can set one up for a year “as late as the due date (including extensions) of your business's income tax return for that year,” and the contribution must be deposited by that same date (IRS, SEP FAQs; IRC 404(h)(1)(B)). For a calendar-year S corporation the return is due on the 15th day of the third month after year end, with a six-month extension on Form 7004 (Instructions for Form 1120-S). The catch is the extension itself: if the corporation did not file for one and deposits the contribution after the unextended due date, the contribution is deducted on the following year's return (IRS, SEP FAQs). The contribution is not reported as wages; the W-2 shows only the retirement plan check in box 13 for an active participant in a SEP (2026 Instructions for Forms W-2 and W-3).

SEP vs solo 401(k) vs SIMPLE IRA for an S corporation owner

The 401(k) wins on room because the owner can defer $24,500 of pay on top of the same 25% employer piece (IRS, one-participant 401(k) plans). The SIMPLE wins on simplicity for an owner with staff who wants a fixed employer cost, a 3% match or 2% nonelective contribution, but it caps the owner at a $17,000 deferral and cannot coexist with another plan (IRS, SIMPLE IRA plan). The SEP sits between them: no deferrals, no filings, and the same percentage for everyone.

A labeled illustration: an owner and one employee

The rate is chosen each year, so a good year can carry 25% and a thin one zero, as long as the owner and the employee get the same rate. Licensed tax professionals at BEG's tax partner set the salary and the contribution rate together, with your CPA, as part of Forward Tax Planning.

Sources: 26 U.S.C. 408(k), simplified employee pension defined; 26 U.S.C. 402(h), special rules for simplified employee pensions (exclusion limit); 26 U.S.C. 404(h), deduction for SEP contributions; 26 U.S.C. 1401, self-employment tax rates (for the payroll tax comparison); IRS, Notice 2025-67, 2026 amounts relating to retirement plans and IRAs; IRS, Publication 560 (2025), Retirement Plans for Small Business; IRS, Publication 15 (2026), Social Security wage base; IRS, 2025 Instructions for Form 1120-S, when to file; IRS, 2026 General Instructions for Forms W-2 and W-3, box 13 retirement plan; IRS, Retirement plans FAQs regarding SEPs, reviewed August 1, 2026; IRS, Retirement plan FAQs regarding contributions, S corporation, reviewed April 8, 2026; IRS, S corporation compensation and medical insurance issues, reviewed March 3, 2026; IRS, One-participant 401(k) plans, reviewed April 9, 2026; IRS, SIMPLE IRA plan, reviewed April 2, 2026. Figures and rules checked against these sources on September 26, 2026. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.