Best Small Business Retirement Plan? SEP vs. SIMPLE IRA
Retirement plans for small businesses attract top employees and offer tax benefits. Learn the difference between a SEP vs. a SIMPLE IRA when choosing a plan.
Key Takeaways
A small business retirement plan can have long-term benefits for the business owner, employees and the company, as well as tax benefits today.
SEP and SIMPLE IRAs are two popular options for small businesses, as they help employers and employees plan for retirement.
These plans have key differences, including requirements for the number of employees, contribution limits and employer contributions.
As a small business owner, planning for retirement is essential. Without a 401(k) or employer-sponsored plan, you'll need to secure your own financial future and assist your employees in saving for retirement as well.
So, in addition to other roles—boss, accountant and human resources professional—you must also be a retirement plan sponsor. That means selecting the best retirement plan for your business. Where to start?
Get answers and understand what a business retirement plan can mean for you, your business and your employees. Then, compare a SEP IRA and a SIMPLE IRA—two popular options. Let’s start with your questions.
Does My Small Business Need a Retirement Plan?
The short answer is yes. It’s essential for you and your employees to save. Most people’s Social Security benefits are insufficient to cover living expenses in retirement, and many workers no longer have pensions.
Offering a retirement plan can help maintain quality of life in retirement. It can be good for your business in the long run, too, because employees appreciate the benefit and the investment in their futures.
Offering a retirement plan not only helps you and your employees invest, but it can also help differentiate your small business, boosting employee recruitment and retention. About 57% of small businesses with fewer than 100 employees offer a retirement plan.2
What Are the Tax Benefits of a Small Business Retirement Plan?
I’m glad you asked, because offering a small business retirement plan can help your business save on taxes—and that’s good for your bottom line. You and your employees can also get tax advantages as you save. Here’s how.
Tax Advantages for Your Business
Every contribution to the retirement plan—for yourself or employees—may be tax-deductible, lowering the business’s taxable income. For self-employed individuals, contributions made for yourself can also be deductible, usually as an adjustment to your gross income on tax day.
Some administrative fees may be deductible, and you may qualify for tax credits on setup and administrative costs for the first three years, including for employee education.
If you offer a SEP or SIMPLE IRA, which we discuss later, you could qualify for tax credits for plan contributions for employees earning less than $100,000. The credits apply for the first five years of the plan, and the amounts vary depending on year and number of participants.
If your plan includes automatic enrollment (SIMPLE IRA plans can), you may be eligible for an additional tax credit for the first three years, available for new and existing plans.
That’s a lot to digest, so to determine what your business qualifies for, consult a tax advisor about eligibility and to avoid missing deductions or credits.
- Business tax deductions for contributions for you and employees.
- Tax deductions for some administrative fees.
- Tax credits for plan set-up and administration, contributions (for SEPs and SIMPLEs) and automatic enrollment.*
*Learn more about details and eligibility at irs.gov.
Tax Advantages for You and Your Employees
Pre-tax contributions you or your employees make to their retirement account can help reduce your taxable income. Contribution and investment gains grow tax-deferred, meaning you don’t pay taxes until you withdraw the funds in retirement.
If your plan offers a Roth option with after-tax contributions, the advantages are tax-free gains and withdrawals.
Some participants may also qualify for a saver’s credit if they are mid- to low-income earners. The IRS sets the adjusted gross income limits each year.
What’s the Best Retirement Plan for My Small Business?
Deciding what’s best for your business depends on a few factors:
How many employees?
Who contributes to the plan—only you, or you and your employees?
How easy is it to administer?
How flexible is the plan?
While you do have several retirement plan options, let’s compare two popular choices among small business owners: SEP IRAs and SIMPLE IRAs.
SEP vs. SIMPLE IRA Plans
Why these two plans? Both are considered relatively easier to set up and manage, with less paperwork than other plans. Both offer tax-deferred growth, and both may satisfy an employer’s responsibility to offer a retirement plan if your state mandates such a plan. However, there are key aspects to consider when selecting a plan. Let’s start with a quick comparison of the features, then review some considerations of why you might want to choose one over the other.
SEP IRAs vs. SIMPLE IRAs: Compare the Features
SEP IRA | SIMPLE IRA | |
|---|---|---|
Company Size | Any size | 100 employees or fewer |
Amount of Paperwork | Less than other plans, such as 401(k)s or other qualified plans | Less than other plans, such as 401(k)s or other qualified plans |
Contribution Limits | 25% of employee salary, up to $70,000 for 2025 ($72,000 for 2026) | Amount differs based on plan size. Smaller plans can have limits that are 110% of the standard limits • Standard: $16,500 for 2025 ($17,000 for 2026) as employee salary deferral |
Employer Contributions Required | No | Yes. An employer can make standard match or non-elective contributions, plus additional non-elective contributions • Standard: Employer matches up to 3% or a flat 2% of compensation |
Employee Salary Deferrals Allowed | No, employer provides all contributions | Yes |
Catch-Up Contributions for Employees Over 50 | No | Yes, amounts vary based on the plan size for 2025 and employee age for 2025 through 2028 • Standard: $3,500 for 2025 ($4,000 for 2026) |
*Applies automatically to SIMPLE IRA plans with 25 or fewer employees. Plans with 26 to 100 employees can elect to offer the increased limits. If so, the employer must provide enhanced contributions. Catch-up contributions for those aged 50 and older can also be 110% of the limit for 2025 (except for employees aged 60 to 63). The standard catch-up contribution limit is the same for all plan sizes in 2026, unless the employee is between 60 and 63 years old with higher limits.
What Is a SEP IRA?
A Simplified Employee Pension IRA (SEP IRA) can be used with any size business, including a sole proprietorship. The employer funds all contributions, which must be the same percentage for each employee. However, as an employer, you are not required to contribute every year.
Employees do not contribute to the plan and are always 100% vested in plan contributions. That means the money belongs to them immediately as each contribution is made.
Why Choose a SEP IRA?
Flexibility is a key attraction of a SEP IRA. If your business experiences lean profits one year, you can waive a SEP IRA contribution. As an employer, you decide which years to contribute and which to skip. Many self-employed or gig workers may want to consider a SEP IRA due to this flexibility. However, you won't get the business tax deduction in years you don't contribute.
In addition, SEP IRAs are low cost, easy to set up and maintain, and offer higher contribution limits than some other retirement plans. You also don't have to file additional paperwork with the IRS to maintain your plan.
What Is a SIMPLE IRA?
A Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) can be used by smaller companies with up to 100 employees.
Employees can defer some of their salary into their SIMPLE IRA account. The employer must match each employee’s contributions dollar for dollar, generally up to 3%, or provide a flat 2% contribution to every employee (whether they contribute or not).
Companies with 26 to 100 employees can increase the match to 4% and the flat rate to 3%. Employers can also make an additional non-elective contribution to each employee of up to 10% of compensation or up to $5,000.
Employees are always immediately 100% vested in both their own and the employer’s plan contributions. Additionally, employees aged 50 and above can make “catch-up” contributions by an amount determined by the IRS each year.
Why Choose a SIMPLE IRA?
SIMPLE IRAs are, frankly, one of the simplest plans to manage. In many ways, they function like a 401(k) plan, with employee salary deferrals and potential employer matching—but with less effort and typically lower expenses.
There is no annual IRS filing, no compliance testing and no need for a costly third party to help administer the plan. However, employers must notify eligible employees about the plan by November 1 of each year.
Employers can also decide whether they want to match employee contributions or contribute a flat percentage rate each year. However, you must choose one or the other; you cannot opt out, unlike a SEP.
Employers must notify all eligible employees by November 1 about what the plan will offer in the coming year. That includes letting them know they can make salary deferrals, and what the matching or flat contribution amounts will be.
What Are the Legal or Compliance Requirements for SEPs and SIMPLEs?
Small businesses are drawn to SEP IRAs and SIMPLE IRAs because they require minimal compliance work. Typically, there’s no need to file annual financial reports with the federal government.
However, the employer must complete and distribute copies of IRS Form 5305-SEP or IRS Form 5305-SIMPLE to notify eligible employees about the plan’s offerings each year. You will want to keep a copy of each year’s form as proof that you provided it.
Investing in a SEP or SIMPLE IRA
Depending on the investment firm managing the plan, SEP and SIMPLE IRAs can offer a range of investment options. It’s essential to regularly review and, if necessary, adjust retirement plan investments in response to future regulations, business dynamics or personal circumstances.
SEP and SIMPLE IRA Plan Deadlines
Like just about everything related to taxes and your business, there are deadlines for opening a SEP IRA or SIMPLE IRA.
A SEP IRA must be established by the employer's tax deadline plus any extensions.
A SIMPLE IRA must be established by October 1 of the year the plan becomes effective.
Make the Plan Your Own for the Future
Once you establish your business retirement plan, consider regular contributions to your own retirement. Contributions you make for employees to a SIMPLE IRA are mandatory, so that will automatically become a habit.
For SEP IRAs, although contribution flexibility is allowed, you may want to consider the benefits of regular investing, as well as the tax savings that come from making annual contributions.
Many business owners wait until their tax day (plus extensions) to contribute. But making smaller contributions throughout the year may be easier to manage than coming up with one larger sum at tax time. Whichever strategy you choose, your future self and your employees will be grateful.
Authors
Financial Consultant
Need Help Choosing a Retirement Plan?
Contact a Business Retirement Specialist at 1-800-345-3533 or review our retirement plans for small businesses.
2025 Retirement Survey, American Century Investments, July 2025.
Small Employers’ Economics of Offering Retirement Savings Plans, pew.org, July 2024.
IRS Circular 230 Disclosure: American Century Companies, Inc. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone unaffiliated with American Century Companies, Inc. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
If withdrawals are made within the first two years of participation in the SIMPLE IRA, the penalty increases to 25%.
Please consult your tax advisor for more detailed information regarding the Roth IRA or for advice regarding your individual situation.
Taxes are deferred until withdrawal if the requirements are met. A 10% penalty may be imposed for withdrawal prior to reaching age 59½.
You could lose money by investing in a mutual fund, even if through your employer's plan or an IRA. An investment in a mutual fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.