Are you ready to set up a tax-advantaged retirement plan for your small business? If so, two of the most popular options are Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLEs). Under either arrangement, you adopt a basic written plan and, generally, make contributions on behalf of each participant — whether that's you alone or you and your staff.
Both types of plans provide current tax deductions for contributions and tax-deferred compounding. So, establishing one can help reduce your income taxes for 2026 and beyond. The plan you choose determines the specific requirements, including a deadline for setting it up that allows deductible contributions on your 2026 return.
SEP plans are often the preferred retirement plan option for self-employed individuals and owners of very small businesses with no employees. Why? Because they're easy to set up and can allow large annual deductible contributions. In this case, "self-employed" can mean a:
If you fall into one of these categories, your annual deductible SEP plan contributions can be up to 20% of your net self-employment income.
For a sole proprietor or single-member LLC owner, self-employment income for this calculation equals the net profit shown on your Schedule C less the deduction for 50% of self-employment tax claimed on your personal federal income tax return. For a partner or member of a multi-member LLC, self-employment income equals the amount reported on your Schedule K-1 less the deduction for 50% of self-employment tax claimed on your return.
If you're an employee of your own corporation, it (as a separate taxable entity) can establish a SEP plan and make an annual deductible contribution of up to 25% of your salary. And that company contribution is federal-income-tax-free to you on your personal return.
For 2026, the maximum contribution to a SEP plan is $72,000. However, there's no requirement to contribute anything for a particular year. So, in years when cash is tight, you can contribute a small amount or even nothing.
For a one-person business, a SEP plan is extremely simple to set up at a brokerage firm or financial institution. You can complete the required paperwork — IRS Form 5305-SEP — in just a few minutes.
Among the best things about these plans is that you can establish one as late as the due date of the tax return for the year in which you claim a deduction for your initial contribution to the SEP-IRA created under the plan. For example, say you're a sole proprietor or the owner of a single-member LLC treated as a sole proprietorship for tax purposes. You could establish a SEP plan anytime between now and the April 15, 2027, filing deadline for the 2026 tax year. Then you could make an initial contribution to your SEP-IRA by that date and deduct it on your 2026 return.
If you extend your return to October 15, 2027, you could establish a SEP plan between now and that date. Then you could make your initial contribution by the October 15 extended filing deadline and deduct it on your 2026 return.
If your small business has employees, establishing a SEP plan isn't a no-brainer because you might have to allow them to participate, which means setting up SEP-IRAs for them and making contributions on their behalf. (Elective deferral contributions aren't allowed, so employees can't contribute. For more information on elective deferrals, see "SIMPLE Contribution Limits" below.)
If you choose to make SEP plan contributions for yourself for a particular year, you must also make them for all eligible employees, which includes those who:
These employer contributions generally must be made at the same rate for all eligible participants — including yourself. Also, participants own the SEP-IRAs you sponsor for them, so contributions you make for covered employees vest immediately. That means they can leave their jobs at any time without losing the funds.
For these reasons, SEP plans are often less attractive for businesses with multiple employees. On the bright side, you (or your business if it's a corporation) can deduct any contributions made on behalf of eligible participants.
SIMPLEs are also a viable option for the self-employed and small businesses. To be eligible, your business can't have more than 100 employees, counting only those who earned at least $5,000 during the previous year. If you're self-employed, you're treated as an employee of your business for purposes of the rules.
SIMPLEs are relatively easy to set up. You can either:
Important: Generally, you must establish a SIMPLE by October 1 of the year for which it's to be effective for tax purposes. However, special rules apply to certain newly established businesses.
A major difference between SEP plans and SIMPLEs is that SIMPLEs allow elective deferral contributions. These are amounts employees (including you as a self-employed person or an employee of your corporation) choose to have deducted from their paychecks and contributed directly to a retirement plan.
For 2026, the maximum SIMPLE elective deferral contribution is generally $17,000. However, employers with 25 or fewer employees — including self-employed individuals — are eligible for an increased maximum elective deferral contribution of $18,100.
No matter the amount, your elective deferral contributions both reduce your taxable income and grow tax-deferred until withdrawn. And there are key differences between SIMPLE elective deferral contributions and SEP plan contributions, depending on business structure.
For instance, say you earn $40,000 of net self-employment income annually and run your business as a sole proprietorship or single-member LLC that's treated as a sole proprietorship for federal tax purposes. If you contributed the $18,100 elective deferral maximum, your taxable income would be reduced by that amount. Whereas if you'd set up a SEP plan, your maximum contribution would be limited to $8,000 (20% × $40,000).
Now let's say you're a shareholder-employee of your solely owned corporation with the same $40,000 annual salary. If you contributed the $18,100 elective deferral maximum, your taxable salary would be reduced to $21,900 ($40,000 − $18,100). In contrast, if you'd set up a SEP plan, your maximum contribution would be limited to $10,000 (25% × $40,000).
Another major difference between SEP plans and SIMPLEs relates to the extra amounts that people age 50 or older can contribute — known as catch-up contributions. SIMPLEs allow them; SEP plans don't.
For 2026, the standard maximum catch-up contribution for SIMPLE participants who are age 50 or older on December 31, 2026, is $4,000. Catch-up contributions reduce your taxable income (if you're self-employed) or your taxable salary (if your business is a corporation) while allowing you to put more into your SIMPLE-IRA. In effect, catch-up contributions are deductible in determining your taxable income.
What's more, SIMPLE participants who are age 60, 61, 62 or 63 on December 31, 2026, are eligible for "super" catch-up contributions of $5,250. If you're age 63 for part of the year but turn 64 before January 1, 2027, the standard $4,000 catch-up contribution maximum applies.
Important: Under the special rule for employers with 25 or fewer employees that increases the elective deferral limit to $18,100, the applicable catch-up contribution for participants age 50 or older is $3,850 — unless they're eligible for super catch-up contributions, in which case the $5,250 limit still applies.
All employees who received at least $5,000 in compensation during any two previous years (whether or not consecutive), and who are reasonably expected to receive at least $5,000 in compensation during the current plan year, must be eligible to participate in a SIMPLE during the calendar year.
As the employer-sponsor, your business must make mandatory annual contributions for participating employees under one of two methods. In either case, these employer contributions — along with employee elective deferral contributions (including catch-up contributions) — are immediately 100% vested. And as with SEP-IRAs, employees own their SIMPLE-IRAs, so they can take them and the funds within when leaving their jobs.
Here are your two options for making employer contributions to participants' SIMPLE-IRAs:
1. Matching contributions. Your business may choose to match each employee's elective deferral contributions (including your own elective deferral contribution if your own corporation employs you) dollar-for-dollar up to 3% of the employee's compensation. However, you can reduce the match to as low as 1% for up to two out of every five years. If an employee doesn't make any elective deferral contributions for the year, there's no requirement to make any employer matching contribution for that person.
If you're self-employed, you can still make a matching employer contribution to your SIMPLE-IRA because, for this purpose, you're considered an employee of your business. And you can deduct the matching contribution on your personal return.
2. Nonelective contributions. Your business may opt to make contributions of 2% of each participating employee's compensation, regardless of whether the employee makes any elective deferral contributions. If you're self-employed, you can still make a nonelective employer contribution to your SIMPLE-IRA and deduct it on your personal return.
In some cases, matching contributions can be more cost-effective than nonelective ones. For example, say most or all of your lower-paid employees don't make any elective deferral contributions. So, you don't have to make any employer matching contributions for them. But you can make matching employer contributions for higher-paid employees — such as owner-employees — who do make elective deferral contributions. In effect, you can use employer contributions as incentives for key employees.
Ultimately, choosing between a SEP plan and a SIMPLE often comes down to a tradeoff between contribution flexibility and savings opportunities. SEP plans offer higher potential limits and the freedom to reduce or skip contributions in lean years. This makes them attractive for self-employed individuals and small business owners with higher or fluctuating incomes—particularly those without employees or who aren't concerned about the cost of making proportional contributions for employees.
In contrast, SIMPLEs let owners with more modest incomes save more through elective deferrals and catch-up contributions. However, they require annual employer contributions and generally must be established by an earlier deadline. (Again, that's October 1, 2026, if you're seriously considering implementing one to reduce your 2026 taxes!)
The right choice depends on your business structure, compensation level, cash flow, workforce size and long-term retirement goals. A careful comparison can help ensure you maximize both the tax benefits and retirement savings opportunities. Contact your tax advisor to evaluate which option best fits your circumstances and for help implementing a strategy tailored to your small business.