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SEP Calculation??

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    SEP Calculation??

    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.

    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



      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?
      Roland Slugg
      "I do what I can."


        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.


          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.


            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!