The Simplified Employee Pension (SEP), Individual retirement account (IRAs) offer an effective retirement savings solution for small companies, including S- corporations. They are designed with efficiency and simplicity in mind, SEP-IRAs are beneficial to both employers as well as employees. For those who are an S- corp manager, owner or advisor who is weighing retirement plans, there are some essential things to bear in mind when considering the flexible retirement vehicle.
What is a SEP-IRA?
SEP-IRAs are the type of retirement plan which allows employers to contribute to traditional IRAs that are set up for employees. These plans are simple to establish, require little documents and have large contributions limits. They are particularly popular with entrepreneurs and self-employed persons. They are also easy to establish and maintain, SEP-IRAs provide advantages that are appealing to small-sized businesses as well as S-corporations.
Benefits of SEP-IRAs that are important to consider:
- High Limits on contributions (up to $69,000 in 2025)
- Contributions are tax-deductible to the company
- Immediate vesting of all employer contributions
- Contributions are not needed every year, which makes it flexible annual funding.
- Simple to manage and requires no annual IRS filings
How SEP-IRAs Work in an S-Corporation
For S-corps, SEP-IRA, contributions are based solely on W-2 wages that are paid to employees, which includes the owners. The distributions or shareholder draws do not contribute to SEP calculation. So, S-corp owners have to be paid a fair salary to pay SEP contributions for themselves.
In addition, the employer must provide the same amount of the salary of all employees who are eligible. If, for instance, that you make a contribution of 20% of salary to a SEP-IRA, you have to make a contribution of 20% to every salaried employee’s W-2 income in addition.
Eligibility Rules
When setting up a SEP-IRA, it is crucial to determine who’s eligible to contribute. The IRS sets out specific requirements to determine eligibility for employees. Employees are eligible if:
- Are at the age of 21 years
- Have been employed by the company for at least three of the past five years.
- Earn at least $750 in 2025.
Tax Implications
The contributions to a SEP-IRA account are not part of the employee’s tax deductible income. They also do not have to pay Federal Insurance Contributions Act (FICA), Medicare or Federal Unemployment Tax Act (FUTA) taxes. If you are an S-corp this is an expense that is tax-deductible for business and reduces the overall tax burden.
Example: Imagine that an S-Corp owner named Sarah pays herself an annual W-2 of $120,000. She decides to give 25% of her earnings to SEP-IRA. This is a contribution of $30,000, completely tax-deductible by the business. In the event that she has two workers that are eligible for the participation in the plan and earning $50,000 per annum, she has to pay 25% of their salary ( $12,500 for each) in their SEP IRAs. This illustrates the uniformity rule and the potential costs if employees are involved.
SEP-IRA Vs. Others Retirement Plans
SEP-IRAs are more straightforward and provide higher limits on contributions than traditional IRAs but they do not permit employee deferrals and Roth contributions. Businesses seeking greater flexibility, especially solo proprietors may want to consider a solo 401(k) which permits both employer and employee contributions.
Who Should Consider a SEP-IRA?
The choice of a retirement plan depends on the structure of your company and goals, as well as the size of your team. SEP-IRAs can be an ideal option in these scenarios:
- Owners of sole-proprietorship or S-corp who have very few or no employees
- Businesses seeking an easy affordable, low-cost retirement plan
- Employers looking for flexibility in their contribution structure
Key Takeaways
SEP-IRAs can be a useful retirement planning instrument to S-corp owners who want to cut down on tax-deductible income as well as save money for retirement. They are simple, flexible and have significant tax benefits. If you’re considering options for retirement plans for your company, a SEP-IRA might be a smart and wise choice.
Are you thinking about the possibility of a SEP-IRA in your S-corp? Contact us to begin the discussion. The experts from Parr & Ibarra CPA in Keller, Texas will assist you in evaluating your options and figure out the most appropriate retirement plan to meet your needs.
