Calculate your maximum SEP IRA contribution for the current year.
Understanding the SEP IRA Contribution Calculation
A Simplified Employee Pension (SEP) IRA is a retirement savings plan designed for self-employed individuals and small business owners. It allows employers to make contributions on behalf of themselves and their employees. The maximum contribution an employer can make to a SEP IRA for any participant is the lesser of:
25% of the participant's compensation, or
A statutory dollar limit set by the IRS ($69,000 for 2024).
However, for self-employed individuals (sole proprietors and partners), the calculation is slightly more complex because "compensation" for SEP IRA purposes is calculated differently. It's based on your net adjusted self-employment income.
How the Calculator Works:
This calculator helps you determine your maximum allowable SEP IRA contribution.
For Self-Employed Individuals (Sole Proprietors/Partners):
Net Earnings from Self-Employment: This is your gross income from your business minus your deductible business expenses.
Deductible Self-Employment Tax: You must pay self-employment tax (Social Security and Medicare). Half of this tax is deductible.
Reduced Compensation: Your "compensation" for the SEP contribution calculation is your net earnings from self-employment, reduced by one-half of your deductible self-employment tax and by the SEP contribution itself. This effectively means your compensation is reduced to approximately 92.35% of your net adjusted self-employment income before the SEP contribution.
Contribution Limit: The maximum SEP contribution is 25% of this reduced compensation.
The formula used here simplifies this by first calculating net adjusted self-employment income, then determining the maximum contribution based on the effective rate which accounts for the deductible SE tax and the SEP contribution itself (approximately 20% of net adjusted self-employment income for sole proprietors).
For Employers with Employees:
If you have employees, you must contribute the same percentage of compensation for each eligible employee as you do for yourself. This calculator focuses on the individual's maximum contribution, assuming they are calculating for themselves or an employee where the compensation is clearly defined.
Key Inputs:
Your Compensation: This is your gross income before business expenses and taxes. For employees, it's their W-2 income. For self-employed individuals, it's their gross business revenue.
Business Expenses: Applicable only to sole proprietors and partners. This is your deductible business expenses.
Employer Contribution Percentage: The percentage you intend to contribute, up to the maximum allowed.
Disclaimer: This calculator provides an estimate. Tax laws are complex and subject to change. Consult with a qualified tax professional or financial advisor for personalized advice regarding your specific situation.
function calculateSepContribution() {
var compensationInput = document.getElementById("compensation");
var businessExpensesInput = document.getElementById("businessExpenses");
var employerContributionPercentageInput = document.getElementById("employerContributionPercentage");
var resultDiv = document.getElementById("result");
// Clear previous results
resultDiv.innerHTML = ";
// Get values and validate
var compensation = parseFloat(compensationInput.value);
var businessExpenses = parseFloat(businessExpensesInput.value);
var employerContributionPercentage = parseFloat(employerContributionPercentageInput.value);
// Check if inputs are valid numbers
if (isNaN(compensation) || compensation < 0) {
resultDiv.innerHTML = 'Please enter a valid Compensation amount.';
return;
}
if (isNaN(businessExpenses) || businessExpenses < 0) {
businessExpenses = 0; // Treat as 0 if not entered or invalid for simplicity, or prompt error
}
if (isNaN(employerContributionPercentage) || employerContributionPercentage 25) {
resultDiv.innerHTML = 'Employer contribution percentage must be between 0% and 25%.';
return;
}
var maxAnnualLimit = 69000; // IRS limit for 2024
var calculatedContribution = 0;
var effectiveCompensation = 0;
var finalContributionAmount = 0;
// Handle self-employed calculation (approximate for simplicity)
// Net earnings from self-employment = Compensation – Business Expenses
var netSelfEmploymentIncome = compensation – businessExpenses;
if (netSelfEmploymentIncome < 0) {
netSelfEmploymentIncome = 0;
}
// For self-employed, the maximum contribution is effectively about 20% of net adjusted self-employment income
// This accounts for the deduction of one-half of self-employment tax and the SEP contribution itself.
// A more precise calculation would involve iterative steps, but 20% of (Net SE Income – 1/2 SE Tax) is a common simplification.
// For simplicity and broad applicability, we'll use a simplified rate. The IRS definition requires reducing "compensation" by half of SE tax and the SEP contribution.
// A simplified calculation can be: Net Earnings from SE * (Rate / (1 + Rate)), where Rate is the desired contribution percentage.
// However, a more direct simplification for the "25% of compensation" rule applied to self-employed is using ~20% of net adjusted self-employment income.
// Let's use the rule: Max contribution = 20% of (Gross Income – Business Expenses) for sole proprietors.
// This is a simplification of the IRS calculation which is 25% of (Gross Income – Business Expenses – 1/2 SE Tax – SEP Contribution).
// Using 20% of net earnings from self-employment is a common shortcut.
// Calculate the base for contribution: 92.35% of net earnings from self-employment
// This approximates reducing net earnings by half of the self-employment tax.
var baseForContribution = netSelfEmploymentIncome * 0.9235;
// Calculate the potential contribution based on the employer percentage, capped at 25% of the base
var potentialContribution = baseForContribution * (employerContributionPercentage / 100);
// Ensure contribution does not exceed 25% of baseForContribution
var maxAllowedByPercentage = baseForContribution * 0.25;
calculatedContribution = Math.min(potentialContribution, maxAllowedByPercentage);
// The final contribution is the lesser of the calculated amount and the IRS annual limit
finalContributionAmount = Math.min(calculatedContribution, maxAnnualLimit);
// Ensure the final amount is not negative
if (finalContributionAmount < 0) {
finalContributionAmount = 0;
}
resultDiv.innerHTML = 'Your maximum estimated SEP IRA contribution is: ' + finalContributionAmount.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + '';
}