When Are Simplified Employee Pension (SEP) IRA Contributions Due?

The simplified employee pension individual retirement account (SEP IRA) is a cost-effective option for small business owners who want to offer retirement benefits to their employees. The employer may also contribute to their own SEP account.

As the name implies, setting up and managing a SEP IRA is streamlined compared to procedures for establishing and maintaining other qualified retirement plans used mostly by big corporations, such as the 401(k).

Notably, contributions to a SEP IRA are made entirely by the employer. Employees, however, may open their own Individual Retirement Account (IRA) and contribute up to the annual limits.

SEP contributions must be made by the tax-filing deadline for the year in which they are made. Here is a closer look at SEP IRAs, how contributions work, and when they are due.

Contribution Deadline for SEP IRAs

Employer contributions to a SEP IRA are made in tax-deductible dollars. Business owners, including the self-employed, can also open a SEP IRA account and contribute to their own retirement savings.

In either case, the deadline is the same. Contributions must be deposited into every employee’s SEP IRA account by that year’s tax-filing deadline, which is typically April 15 of the following year.

If the employer has filed an extension, then the final SEP IRA contribution date is the extension deadline, which is usually October 15.

For example, say John earns $50,000 a year at XYZ Corp. The company wants to contribute 15% of each employee’s compensation to their SEP IRA accounts in 2021. This means that John will receive a $7,500 contribution to his SEP IRA for 2021.

In a normal year, XYZ Corp. would have until April 15 the following year to make the contribution to the employee SEP IRA accounts. If XYZ has filed a tax-filing extension until October 15, then the contributions must be made for John and all other employees by that date.

SEP IRA Contribution Limits

One of the advantages of a SEP IRA is that it has much higher contribution limits than a traditional or Roth IRA. In both 2021 and 2022, the annual contribution limit for a traditional or Roth IRA is $6,000, plus $1,000 for those aged 50 or older.

With a SEP IRA, in 2021, an employer can contribute as much as 25% of an employee’s gross annual salary or $58,000, whichever is less (increasing to $61,000 in 2022). To determine their annual limits, self-employed business owners must make a special computation that factors in the deductible portion of their self-employment tax.

With a 401(k), employers may match a percentage of the employee’s contribution. But in the SEP IRA, the contribution is entirely up to the employer and can change from year to year.

In effect, this makes it a kind of profit-sharing plan. When business is great, the employer may make a generous contribution, as much as 25% of each employee’s salary. When business is bad, the employer may reduce or eliminate the company contribution.

This is not a bonus plan, though. If an employer has a SEP IRA, an identical percentage of salary must be deposited for each eligible employee.

The Bottom Line

A SEP IRA is a way for small business owners to provide their employees with a retirement plan. With a SEP IRA, an employer makes the contributions as opposed to the employee, and they must do so before the tax filing deadline of the following year.