The SEP IRA For Self-Employed Physical Therapists And Occupational Therapists

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Are you a solopreneur physical therapist or occupational therapist trying to figure out which retirement account you should choose to save and invest with?

The SEP IRA is one option you should know about.

This article will give you the ins-and-outs on 

  • What a SEP IRA is
  • Who qualifies to have a SEP IRA
  • How much you can contribute to a SEP IRA
  • When you can open and contribute to a SEP IRA
  • Where you can open a SEP IRA
  • And so much more. . .

Let’s get started.

What Is A SEP IRA?

The SEP IRA is an acronym for a Simplified Employee Pension Individual Retirement Account. 

It is a type of account in which contributions can be made and invested to help you prepare for your eventual retirement.

Who Is Eligible For A SEP IRA?

The Internal Revenue Service stipulates that you can qualify to have a SEP IRA if you 

  • Are at least 21 years old
  • Have worked for your employer for at least 3 of the last 5 years
  • Have made at least $650 for year 2022 or $750 for year 2023 from your employer 

However, the IRS also states that meeting these criteria is not mandatory unless enforced by your employer.

Fortunately, if you’re a solopreneur running your own business, you don’t have to worry about these qualifications.

Can I Have A SEP IRA Even If I Have A Retirement Account Through My Employee Job?

Yes, the IRS tells us that you can have a retirement account with your employee job and a SEP IRA with your self-employment job as well.

For example, let’s say you work as an employee as a physical therapist or occupational therapist for one job and get an employee-sponsored 401(k) retirement account. However, you also have a physical therapy side hustle or occupational therapy side hustle where you do home health contract work. You can open a SEP IRA for your side hustle.

How Do I Contribute To A SEP IRA?

You don’t. Employees cannot contribute to a SEP IRA, only employers can.

So, if you are a solopreneur, the contributions that will be made to your SEP IRA will technically be made by your business and not by you.

Once the contribution is made to your SEP IRA, though, that money now belongs to you as the employee. This is referred to “immediate vesting.”

How Much Can Be Contributed To A SEP IRA?

The amount the employer can contribute to your SEP IRA is limited by how much you make as an employee for that business. 

This amount is slightly different if you work as an employee (including owning a corporation that you technically work for) vs if you are a self-employed sole proprietor.

a. Contributions If You Are An Employee of A Business Or You Have An LLC or Corporation

In year 2022, an employer can contribute up to either 25% of an employee’s gross income (how much you make before accounting for expenses, deductions or taxes) or no more than $61,000 – whichever is less. 

Keep in mind that, in order to be able to contribute that maximum $61,000 limit for year 2022, you must make at least $244,000 (25% of $244,000 is $61,000). 

For example, let’s say you are a solopreneur doing home health on a contractual basis. You have an S-Corp and you made $100,000 in year 2022. Your business can contribute up to $25,000 to your SEP IRA since 25% of $100,000 is $25,000 and $25,000 is less than $61,000.

b. Contributions Limits If You Are A Sole Proprietorship 

If you are operating as a sole proprietor, the situation changes a little because you are both the employer and the employee – there is no defined difference in roles as there might be if you formed an entity such as a corporation.

Therefore, any contribution made to your SEP IRA is actually being made by you rather than by a business. This results in you getting a tax deduction for this contribution, rather than a business getting the tax deduction. Similarly, all business-related tax deductions flow directly to you on your taxes. So, the IRS requires that you account for these when determining how much you can contribute to your SEP IRA.

To do this, determine your gross income by taking how much you made and subtracting your business-related tax deductions, self-employment taxes paid, and the amount that will be contributed to your SEP IRA. This resulting value is called your net income. 

Then, multiple your net income by 25%. If that resulting value is less than $61,000 (for year 2022) then that is the maximum that can be contributed to your SEP IRA. But if that value is more than $61,000 then $61,000 is the maximum amount that can be contributed to your SEP IRA.

If this sounds too cumbersome, you can make a rough estimate on how much you can contribute to your SEP IRA by skipping calculating the value of your net income and simply using 20% instead of 25% to multiply with your gross income since the maximum you can contribute to your SEP IRA is usually just a little less than this resulting value.

I recommend running all of this by your tax professional before making any contributions.

Can More Be Contributed To A SEP IRA If I Am Over 50 Years Old?

No, you are not allowed what are called catch-up contributions, which are an increase in the amount that can be contributed to a retirement account beginning at a certain age.

Do I Need To Contribute To A SEP IRA Every Year?


Is There A Deadline For When A Contribution To A SEP IRA Must Be Made?

Contributions can be made to a SEP IRA for a given tax year up until the day your employer pays their taxes. This is usually April 15th of the following year, but if the business sponsoring your SEP IRA files an extension on their taxes then it can be pushed all the way to October 15th.

How Do Taxes With A SEP IRA Work?

A SEP IRA is a tax-deferred retirement account. That means that contributions are made pre-tax, similar to an employer-sponsored 401(k).

An employer who makes a contribution to your SEP IRA can get a tax deduction for doing so – you do not get the tax deduction because you are not the employer. If you are a solopreneur running your own business, then you do not personally get this tax deduction – instead, your business benefits from getting the tax deduction.

Since you, as the employee, are not making the contribution to your own SEP IRA and not personally getting the tax deduction for doing so, you do not need to report the amount contributed to your SEP IRA as income when filing your taxes. 

For example, if a physical therapist did independent contractor work as a side hustle and made $20,000 and you receive $5,000 in your SEP IRA, you only have to report your $20,000 as income on your taxes. 

Don’t worry, it may feel like you’re hiding money from the IRS but you’re not – they know the money is in your SEP IRA because the business that made the contribution had to report it to get the tax deduction for making that contribution. 

When you decide to withdraw money from your SEP IRA, that is when you will be taxed. You can learn more about tax implications for employees withdrawing money from a SEP IRA account under the next heading “How Does Withdrawing Money From A SEP IRA Work?” below.

How Does Withdrawing Money From A SEP IRA Work?

Age and taxes are the important concepts to know about here, so let’s break them down separately.


You can begin withdrawing money from your SEP IRA whenever you like. 

However, you may want to wait until you are at least 59 ½ years old. That’s because if you are younger than 59 ½ years old, you will have to pay a 10% penalty tax on your withdrawals.

The other important age to know about is 72 years old. That is the age you are required to begin taking required minimum distributions from your SEP IRA account.


Since the contributions your employer had made to your SEP IRA account were not taxed, your withdrawals will be taxed as normal income. 

Example On Withdrawals

Let’s say you are a 62-year-old retired occupational therapist, but you still work prn home health to bring in some income. That year you generate $40,000 from your work and you also decide to withdraw $30,000 from your SEP IRA. This would give you $70,000 to live on for that year. You should expect to pay tax on all $70,000.

Now, let’s say you were 56 years old. Since you are younger than 59 ½ years old, the $30,000 you withdrew from your SEP IRA will not only be taxed as normal income but it will also incur a 10% tax penalty.

How Is A SEP IRA Impacted If I Hire Employees?

The IRS requires that employees be treated equally when it comes to SEP IRA contributions. This does not mean all employees need to receive the same amount of money as contributions. Instead, the employer must contribute the same percentage from each employee’s income. 

While this makes sense since each employee likely earns a different income, this can quickly add up to being quite costly for your business.

Which employees qualify for this treatment? They must be

  1. At least 21 years old
  2. Make at least $600 from your business in a given year
  3. Have worked for your business for at least 3 of the last 5 years

Example On Having Employees

Let’s say you are a physical therapist who has an S-Corp and contracts with home health agencies for patients. You have a SEP IRA and each year you’ve been contributing 10% of your income to your SEP IRA. You’re doing very well, so you decide to expand and hire other therapists to work for you. Assuming these therapists meet the qualifications listed earlier, you will also need to contribute 10% of each therapists’ income to their SEP IRA accounts if you would like to continue to contribute 10% of your income to your SEP IRA account.

How Can I Open A SEP IRA?

A SEP IRA can be opened at many of the well-know brokerages such as

            – Vanguard

            – Fidelity

            – Charles Schwab

            – E*Trade

            – TD Ameritrade

Be sure to compare what each brokerage has to offer before deciding where to open a SEP IRA account.

Does A SEP IRA Have A Roth Option?

No, contributions cannot be made after-tax to your SEP IRA. 

Only pre-tax contributions can be made. 

Can I Do A Backdoor Roth IRA If I Have A SEP IRA?


The pro-rata calculation used for a Backdoor Roth IRA includes the money you have in a SEP IRA. In turn, a SEP IRA does not allow you to do a Backdoor Roth IRA.

What Is A Self-Directed SEP IRA?

A self-directed SEP IRA allows you to place your SEP IRA balance in less traditional investments such as real estate and precious metals. 

A self-directed SEP IRA will typically come with more fees, though.

Final Thoughts. . .

The SEP IRA is a popular retirement plan for the self-employed because it offers many useful advantages, but it definitely has its drawbacks.

SEP IRA Chart 1

You can look over the table above to weigh the pros and cons a SEP IRA offers.

While a SEP IRA does not provide the opportunity for catch-up contributions like an IRA or 401(k), the much higher contribution limits a SEP IRA offers should minimize that concern.

And while you have to treat all employees equally by making the same percentage contribution to all of their SEP IRAs, this doesn’t even apply to you if you are the only employee of your own business with no intentions of ever hiring employees in the future. 

If you do decide to eventually hire employees, though, then a SEP IRA might be a less attractive option.

If you are a solopreneur physical therapist or occupational therapists, before you move forward with opening a SEP IRA as your retirement account of choice, make sure you consider all of your options such as an individual 401(k)

So, what do you think about the SEP IRA account for solopreneurs? Do you have one? Why or why not? Let me know in the comments section below!

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