SEP Contributions Can Still Lower 2025 Tax Bills

Small business owners who use a Simplified Employee Pension plan still have a way to reduce their 2025 taxable income. Contributions may be made through October 15, 2026, the extended deadline for the related tax return. That timing gives SEP users more room than people making regular or Roth IRA contributions, whose 2025 deadline was April 15, 2026.

SEPs can be flexible for employers because yearly contributions are optional. A business can contribute more in a strong year, reduce the amount when finances are tighter, or skip a contribution altogether. When contributions are made, though, the employer must use the same compensation percentage for every eligible participant. Contributions made for employees are generally deductible, within applicable limits, and belong to workers immediately.

Employee coverage can also affect the decision. Workers generally must be included if they are at least 21, have worked for the company in three of the past five years, and earned at least $800 during 2026. This can include part-time and seasonal staff. Setting up the arrangement involves Form 5305-SEP, employee notices and copies, without filing the form with the IRS or submitting annual reports. Later withdrawals are generally taxed as ordinary income, with a 10% penalty typically applying before age 59½ unless an exception applies.