The SEP-IRA Trap When You Have Employees

01The rule in one sentence

The contribution rate must be uniform for all eligible employees. The IRS states it directly: the employer's contribution rate, large or small, is the same for everyone who qualifies. You cannot fund 20% for yourself and 3% for the team.

02Why that lands harder than it sounds

For a solo operator, a SEP is close to free money in tax terms: contribute, deduct, done. Add employees and the same decision becomes a multiple. Deciding to put a large percentage away for yourself is simultaneously deciding to fund that percentage of payroll for everyone eligible. The plan does not get more expensive gradually — it gets more expensive the moment someone crosses the eligibility threshold.

03Who counts as eligible

Eligibility is set by the plan document within limits the IRS defines, typically based on age, how many of the past several years the person worked for you, and a minimum compensation floor. Part-time and seasonal staff can qualify, which surprises owners who assumed only full-timers counted. This is worth reading carefully before the plan is adopted, because the terms are much easier to set than to change.

04What owners do instead

Three common paths. Some tighten eligibility to the maximum the rules allow, which delays when new hires qualify. Some move to a solo 401(k) while they are still the only employee, and accept the extra administration in exchange for control. Some move to a SIMPLE IRA, where the employer obligation is a defined match or a fixed contribution rather than a mirror of whatever the owner takes. The IRS SIMPLE IRA page sets out that structure.

05The mistake that costs the most

Opening the SEP first and thinking about employees later. Once a plan is in place and people are eligible, unwinding it is not a paperwork exercise — it has real cost and real timing constraints. If hiring is anywhere in the next couple of years, the plan choice should be made with that in view, not revisited afterwards.

06Where I come in

I model what each option costs at your actual payroll, at the contribution level you actually want, and at the headcount you actually expect — before anything is opened. That is a spreadsheet question with a clear answer, and it is much cheaper to run now than to discover in the second year of a plan.

This article is general information, not individualized tax, legal, or financial advice. Every situation is different — reach out and we'll look at yours directly.