Business owners still have time to fund retirement for 2025

Small businesses—those with fewer than 100 employees—comprise the majority of businesses in the United States. While most small-business owners agree that retirement benefits are important, they are less likely to offer a retirement plan largely due to cost, time constraints and administration challenges.

Many sole proprietors also face challenges when saving for retirement during the year because they typically do not know their net income after final business expenses until after the end of the year. Retirement plan contributions for sole proprietors are based on adjusted net earnings from self-employment.

A Simplified Employee Pension (SEP) IRA can provide an opportunity for small businesses and sole proprietors to establish and contribute to a retirement savings plan after year-end. Contributions to a SEP IRA are fully funded and deductible by the business. Changes included in the recent Secure Act 2.0 law allow SEP IRAs to also now be funded as Roth accounts, although the effect of a SEP IRA Roth contribution may eliminate immediate tax savings and should be considered carefully by participants for any tax implications. Roth accounts are designed to provide tax-free benefits in the future.

There is still time to fund a SEP IRA for 2025. Business owners and self-employed individuals have until the tax-filing deadline (usually April 15) plus extensions to both establish a SEP IRA, and make a contribution for the previous year.

The contribution limit for a SEP IRA for 2025 is $70,000. The limit increases to $72,000 for 2026 contributions.

SEP IRA accounts offer several benefits:

Contributions are tax deductible

Businesses may take a federal income tax deduction equal to the amount of their employer contributions, up to a maximum of 25% of compensation paid during the year up to the annual IRS dollar limits. For self-employed individuals, the deduction is limited to 20% of net earnings after expenses.

High contribution limits may help maximize retirement savings

The contribution limit for 2025 is $70,000 or 25% of compensation, whichever is less. Self-employed individuals can contribute up to 20% of compensation up to the annual dollar limit.

Contributions are discretionary

Employers can decide how much to contribute, and the amount can vary from year to year. Employers may also skip a year. For business owners with employees, contributions must be nondiscriminatory, and the same salary percentage must be contributed to each eligible employee’s account. Employers may restrict employees from participating in a SEP IRA unless they meet the following conditions: the employee has attained age 21, worked for the business for at least three of the last five years, and have earned at least $750 during the year ($800 for 2026). That may be an important consideration for a business owner with part-time or seasonal employees.

Employee retention

Offering a retirement plan may help attract and retain talent. Benefits, including a retirement savings plan, are important considerations for job seekers. A recent study (see endnote one) found that 42% of employees would sacrifice pay in favor of better benefits. 63% are willing to sacrifice existing benefits for a better choice of benefits. Employees across different demographics cited retirement savings as a top priority as they age. A SEP IRA contribution shows a significant commitment by an employer to the retirement security of eligible employees and contributions are always 100% immediately vested.  

Ease of administration

Because SEPs are established as Individual Retirement Accounts they are relatively easy to maintain and offer a low-cost option for administrative purposes. Each eligible participant will establish a SEP IRA account in their own name to receive contributions. Once a contribution is made by the employer, each participant has full control over their own account including choosing investments and taking withdrawals. This relieves the employer from certain fiduciary responsibilities normally associated with maintaining a qualified retirement plan such as a 401(k).

Tax credits available

Recent legislation provides incentives for business owners to establish a start-up retirement plan, including a SEP. The federal tax credit to offset plan costs—such as administrative, recordkeeping or employee education expenses—may reach up to $5,000 annually. For more information see the IRS resource, “Retirement plans startup costs tax credit.”