SEP IRA Contribution Calculator for Self-Employed
Use this calculator to estimate your maximum deductible SEP IRA contribution for the year if you are self-employed. This calculation takes into account your net business profit, the deductible portion of your self-employment tax, and the IRS annual contribution limits.
function calculateSepIraContribution() {
var netBusinessProfit = parseFloat(document.getElementById('netBusinessProfit').value);
var seTaxRate = parseFloat(document.getElementById('seTaxRate').value);
var desiredContributionPercent = parseFloat(document.getElementById('desiredContributionPercent').value);
var irsAnnualLimit = parseFloat(document.getElementById('irsAnnualLimit').value);
var resultDiv = document.getElementById('result');
resultDiv.innerHTML = "; // Clear previous results
// Input validation
if (isNaN(netBusinessProfit) || netBusinessProfit < 0) {
resultDiv.innerHTML = 'Please enter a valid Net Business Profit.';
return;
}
if (isNaN(seTaxRate) || seTaxRate 100) {
resultDiv.innerHTML = 'Please enter a valid Self-Employment Tax Rate (0-100%).';
return;
}
if (isNaN(desiredContributionPercent) || desiredContributionPercent 25) {
resultDiv.innerHTML = 'Please enter a valid Desired Contribution Percentage (1-25%).';
return;
}
if (isNaN(irsAnnualLimit) || irsAnnualLimit < 0) {
resultDiv.innerHTML = 'Please enter a valid IRS Annual Contribution Limit.';
return;
}
// Convert percentages to decimals
var seTaxRateDecimal = seTaxRate / 100;
var desiredContributionRateDecimal = desiredContributionPercent / 100;
// Step 1: Calculate the amount of net earnings subject to self-employment tax
// This is 92.35% of your net business profit
var totalSETaxableEarnings = netBusinessProfit * 0.9235;
// Step 2: Calculate total self-employment tax
var totalSETax = totalSETaxableEarnings * seTaxRateDecimal;
// Step 3: Calculate the deductible portion of self-employment tax (half of total SE tax)
var deductibleHalfSETax = totalSETax / 2;
// Step 4: Calculate Adjusted Net Earnings (compensation for SEP IRA purposes)
// This is Net Business Profit minus the deductible half of SE tax
var adjustedNetEarnings = netBusinessProfit – deductibleHalfSETax;
// Step 5: Calculate the effective contribution rate for self-employed individuals
// This accounts for the fact that the contribution itself reduces the compensation base
var effectiveContributionRate = desiredContributionRateDecimal / (1 + desiredContributionRateDecimal);
// Step 6: Calculate the potential SEP IRA contribution based on adjusted net earnings
var calculatedContribution = adjustedNetEarnings * effectiveContributionRate;
// Step 7: Apply the IRS annual contribution limit
var finalContribution = Math.min(calculatedContribution, irsAnnualLimit);
// Display results
resultDiv.innerHTML =
'
Adjusted Net Earnings (Compensation): $' + adjustedNetEarnings.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + " +
'
Calculated Contribution (before IRS limit): $' + calculatedContribution.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + " +
'
Your Maximum Deductible SEP IRA Contribution: $' + finalContribution.toLocaleString(undefined, { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + '';
if (finalContribution === irsAnnualLimit) {
resultDiv.innerHTML += '
Your contribution is capped by the IRS Annual Contribution Limit.';
} else if (finalContribution === calculatedContribution && desiredContributionPercent === 25) {
resultDiv.innerHTML += '
Your contribution is based on the maximum 25% of your adjusted net earnings.';
}
}
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Understanding Your SEP IRA Contribution
A Simplified Employee Pension (SEP) IRA is a retirement plan designed primarily for self-employed individuals and small business owners. It allows employers to contribute to their own and their employees' retirement accounts. For self-employed individuals, you are both the employer and the employee, making it a powerful tool for tax-deferred savings.
Who Can Contribute to a SEP IRA?
- Self-employed individuals (sole proprietors, independent contractors)
- Partners in a partnership
- Owners of S corporations or C corporations
- Small business owners with employees (contributions must be made for all eligible employees)
How SEP IRA Contributions Work
Contributions to a SEP IRA are made by the employer (which is you, if you're self-employed) and are tax-deductible for the business. Unlike traditional IRAs, there are no income limitations for contributing to a SEP IRA, and you can contribute even if you participate in another retirement plan.
Contribution Limits for Self-Employed
The maximum amount you can contribute to a SEP IRA each year is the lesser of:
- 25% of your compensation (for self-employed, this is your "net earnings from self-employment" adjusted for self-employment tax and the SEP contribution itself).
- A specific dollar amount set by the IRS for the year (e.g., $69,000 for 2024).
The calculation for self-employed individuals can be a bit complex because your "compensation" for SEP IRA purposes is not simply your net business profit. It must be reduced by one-half of your self-employment tax and by the SEP IRA contribution itself. The calculator above uses the IRS-approved method to simplify this calculation for you.
Key Terms Explained:
- Net Business Profit: This is your gross business income minus your ordinary and necessary business expenses. For sole proprietors, this is typically found on Schedule C, Line 31.
- Self-Employment Tax Rate: This is the tax paid by self-employed individuals to fund Social Security and Medicare. The standard rate is 15.3% (12.4% for Social Security up to the annual limit, and 2.9% for Medicare with no limit). Half of your self-employment tax is deductible when calculating your adjusted gross income.
- Desired Contribution Percentage: This is the percentage of your compensation you wish to contribute. For self-employed individuals, the maximum allowable percentage is 25%.
- IRS Annual Contribution Limit: The maximum dollar amount the IRS allows to be contributed to a SEP IRA in a given tax year. This limit is adjusted periodically for inflation.
Using the Calculator:
Simply enter your net business profit, the self-employment tax rate (the default 15.3% is common), your desired contribution percentage (up to 25%), and the current IRS annual contribution limit. The calculator will then provide an estimate of your maximum deductible SEP IRA contribution for the year.
Disclaimer: This calculator provides an estimate for informational purposes only. It is not financial or tax advice. Consult with a qualified financial advisor or tax professional for personalized advice regarding your specific situation.