Are employer retirement plan contributions deductible?

The short answer and the three questions behind it

Publication 560’s introduction says it plainly: you can deduct contributions you make to the plan for your employees, and if you are a sole proprietor you can deduct the contributions you make for yourself. Earnings on the money are generally tax free until distributed. But “deductible” always comes with three follow-up questions. How much can you deduct? When can you deduct it? And where does the deduction go on your return? This page takes them in order.

How much: the limits by plan type

For a SEP, the deduction is the lesser of your contributions (including any excess carryover) or 25% of the compensation paid to the participants from the business that has the plan, with each participant’s compensation limited to $350,000 for 2025 and no more than $70,000 per participant. In 2026 those amounts are $360,000 and $72,000.

For a defined contribution qualified plan, such as a profit-sharing plan or money purchase plan, the deduction cannot be more than 25% of the compensation paid or accrued during the year to eligible employees participating in the plan. Three rules apply: elective deferrals (401(k) salary reductions) are not subject to the limit; compensation includes elective deferrals; and the maximum compensation per employee is $350,000 in 2025 ($360,000 in 2026). For a defined benefit plan, the deduction is based on actuarial assumptions, so an actuary must figure the limit.

SIMPLE IRA matching and nonelective contributions are deductible too, in the tax year in which the calendar year for which they were made ends, if made by the return due date including extensions.

Worked example

A company pays its three participating employees a combined $240,000 in 2025, and none exceeds $350,000. Under a profit-sharing plan, the 25% deduction limit is $60,000. If the company contributes $75,000, it can deduct $60,000 this year and carry over $15,000. The calculator above does this. The carried-over $15,000 can be deducted in a later year, but only together with that year’s contribution and subject to that year’s limit.

The publication’s Table 4-1 shows the idea over four years: in 2022 a company contributes $100 (thousand) against a $250 limit, then in 2023 contributes $165 against a $100 limit, deducting $100 and carrying $65 forward, and so on until the carryover is used up in 2025.

The 10% excise tax on excess contributions

If you contribute more than your deduction limit, you have made a nondeductible contribution and may be liable for a 10% excise tax. In general it applies to nondeductible contributions to qualified pension and profit-sharing plans and to SEPs, and you report it on Form 5330. The calculator shows an illustrative 10% of the excess; the form computes the actual amount. A special rule exempts contributions made to meet minimum funding requirements in a money purchase pension plan or defined benefit plan.

When and where to deduct

You can deduct contributions for a tax year if you make them by the due date, including extensions, of your return for that year. For a calendar-year taxpayer, you deduct the yearly contributions on the return for the year in which the plan year ends; a fiscal-year taxpayer deducts them on the return for the year the contributions were made for. A promissory note made out to the plan does not count as a payment, and issuing one is a prohibited transaction, covered on our prohibited transaction page.

Where: contributions for common-law employees go on the business return: Schedule C or Schedule F for sole proprietors, Form 1065 for partnerships, and Form 1120 or 1120-S for corporations. Sole proprietors and partners deduct contributions for themselves on line 16 of Schedule 1 (Form 1040), not as a business expense. Partners see their share on the Schedule K-1.

Contributing for yourself is a special case

If you are self-employed, the 25% rate is not simply applied to your net profit, because your own deduction and your own net earnings depend on each other. The publication has you reduce the rate and use a worksheet; our self-employed deduction page walks through it. Also, if you have a net loss from self-employment you cannot contribute for yourself for the year, though you can still contribute for employees based on their pay.

Sources

• IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (2025): Chapter 2 (Deducting Contributions; Carryover of Excess SEP Contributions), Chapter 3 (When/Where To Deduct Contributions), Chapter 4 (Employer Deduction; Deduction Limits; Carryover of Excess Contributions; Excise Tax for Nondeductible (Excess) Contributions). Read November 2, 2026.

Edition read: Publication 560 (2025), for use in preparing 2025 returns. Where the publication gives 2026 figures, this page labels them 2026. Dollar limits change every year; check the current publication and form instructions for your plan year. This page summarizes the publication and does not replace it.