How to Calculate SEP Contributions From Self-Employment
A simplified employee pension is actually a traditional IRA that has some special rules. These rules allow small businesses and self-employed people to use SEPs to fund retirement savings. The contribution limit when you are self-employed depends on how much in earnings your business produces, but you can apply a simple SEP-IRA calculator to figure it out.
If you're self-employed, you can contribute up to a maximum amount each year toward a SEP-IRA retirement account. The limit changes, but currently you can put up to $56,000 toward a SEP-IRA if you're self-employed.
Maximum SEP Contribution
There is a variable limit on the amount you can contribute to your SEP each year. As of 2019, the maximum amount you can put into a SEP IRA each year is $56,000. The annual limit is adjusted by the Internal Revenue Service periodically. Contributions are tax-deductible.
You can use a manual or online SEP IRA calculator to determine your actual limit, which depends on your income. When figuring your SEP contribution limit, count only income from self-employment. Do not include any salary from another job if you are an employee there, and don't count investment or interest income.
Adjusted Net Earnings
You'll also reduce the amount of your Any SEP contribution calculator for self-employment will have you first determine your adjusted net earnings. These are equal to the business revenues minus all deductible business expenses. Net earnings must be adjusted by subtracting one-half of your self-employment tax, meaning your combined Social Security and Medicare taxes.
As of 2019, self-employment tax is 15.3 percent on the first $128,400 of net earnings, so reduce your net earnings by one-half of 15.3 percent, or 7.65 percent. The easy way to do this is to multiply net earnings by 92.35 percent.
Allowable Self-Employment Plan Contributions
You can contribute up to 25 percent of your adjusted net earnings from self-employment to a SEP IRA or the yearly dollar limit, whichever is less. Suppose your net earnings total $200,000. Multiply by 92.35 percent to find the adjusted net earnings of $184,700. Multiply $184,700 by 25 percent to find your SEP contribution limit of $46,175.
SEPs and Salaries
Use the self-employment method to figure your allowable self-employment plan contributions only if your business does not pay you a salary as an employee. This is the case for sole proprietorships, partnerships and some limited liability companies. If you are owner of a business such as a C or S corporation and get a salary, calculate your SEP contribution limit as an employee. The company handles the SEP contribution calculator, making the contribution on your behalf, up to the annual dollar limit or 25 percent of your salary. For example, if you are paid $160,000 a year, the business can add up to $40,000 to your SEP.
Contributing to a SEP IRA
If you're self-employed and not yet contributing to a SEP IRA, you can set some of your taxable income aside for retirement. First determine your allowable self employment plan contributions, then use Form 5305-SEP to get one started. You'll then need to open a SEP-IRA with a financial institution and state the contribution you'd like to make to your new retirement account.
You don't have to use the IRS's form to start your SEP. Many financial institutions offer prototype SEP plans that are approved by the IRS. Simply use the SEP ira calculator to determine how much you'll be able to contribute and the financial institution should be able to walk you through the process.
Since the maximums for self-employed SEP-IRA contributions can change each year, you may need to run a SEP contribution calculator at the start of each tax year to make sure you aren't exceeding the maximum allowable for self-employment plan contributions.
- IRS: SEP Plan FAQs
- Beacon Capital Management Advisors: SEP IRA
- Retirement Plans FAQs regarding SEPs | Internal Revenue Service
- The Motley Fool: 2019 SEP IRA Limits
- Accounting Coach: What Is the Self-employed Person's Fica Tax Rate for 2018 and 2019?
- IRS.gov: How Much Can I Contribute to My Self-employed Sep Plan If I Participate in My Employer’s Simple Ira Plan?
- IRS.gov: Retirement Plans for Self-Employed People
Based in Atlanta, Georgia, W D Adkins has been writing professionally since 2008. He writes about business, personal finance and careers. Adkins holds master's degrees in history and sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.