SEP Calculation??

[Snaggletooth]

Language used by IRS and TTB states that the calculation of the SEP deduction for a self-employed person is "20% of net SE income after 1/2 SETax deduction..[ignore remainder of verbage]...."

But I've heard that 20% is interpreted to be AFTER the deduction for the SEP itself. An example best illustrates.

Black Bart reports Schedule C profits of $32,485. One-half of SE tax is $2485, so his base for calculation is $30,000. Which is true?

1. A simple calculation means Bart can put 20% of $30,000 into his SEP, or $6000.
2. The profit base INCLUDES the expense of the SEP. $6000 deduction means the business has profited only $24,000 and
Bart has exceeded his allowable SEP contribution. The allowable contribution is algebraically calculated at only $5,000,
Since $5000 is regarded as an expense, then the REAL income is $25,000, and the 20% criteria is met.

[S T]

Snags are you using Drake?? - I thought you were, but could be mistaken, although it is always good to know that one is trying to work the mechanics of these mind-boggling issues and not relying on Software

Not sure if this answers your question -

I entered a SEP in the software with the contribution rate of 25% - the software then does the calculation percentage to 20%

Takes the net profit from (let's say Sched C) deducts the deduction for the SE tax on line 27, form 1040) arrives at a net allowed net earnings x 20%, and gives the amount that could be allowed for a SEP

Sandy

[Roland Slugg]

The maximum allowable contribution is $6,000 ... #1 of your two choices. That's exactly what TTB says, isn't it ... 20% of the S-E income first reduced by one-half of the S-E tax?

[Lion]

If the SEP plan is for the maximum allowed 25%, but you are self-employed, the shortcut is to use 20% after reducing by 1/2 SE tax. To use your numbers:

Black Bart reports Schedule C profits of $32,485. One-half of SE tax is $2485, so his base for calculation is $30,000.

The long way is to subtract the $6,000 proposed contribution from $30,000 - 6,000 = $24,000. Then 25% of $24,000 = $6,000 allowed contribution and all is well.

The shortcut takes 20% of $30,000 = $6,000 allowed contribution.

Don't forget the 1/2 SE tax adjustment.

And, if the SEP plan is for a percentage lower than 25%, then substitute your actual plan percentage.

[Snaggletooth]

Thanks Folks

I was wrong, but I knew somewhere I had been drug through a calculation that assumes the SEP as an expense.

Looks like we can beat our head against the wall to achieve 25% of the profit taking the SEP as an expense...

Or, we can just take 20% on the front end and be done with it.

TTB verbage is sparing us the misery of the algebra... Nothing like an ign'rant hillbilly to make something hard
outa something simple.

[BP.]

I've always liked using the TTB SEP chart - p. 13-16. You can shortcut right to the 18.5870% calculation of net SE for 25% rate contributions. Less algebra!