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peggyinca
New Member

Does SEP RA maximum contribution change due to what?

Turbo Tax is saying my maximum SEP IRA contribution for 2022 is some hundreds less than the maximum of 25% of my self-employed income up to a maximum of $61,000. TT says I have to remove the excess contributions or pay a penalty. I made more than the 25%/maximum of $61,000.
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3 Replies

Does SEP RA maximum contribution change due to what?

You have to reduce the Net Profit by the deduction allowed for one-half of your self-employment taxes.  

 

So check 1040 Schedule 1 line 15.  You have to deduct that amount from your Schedule C Net Profit.  That will give you the allowed contribution for self employment & 1099NEC income.

AliciaP1
Expert Alumni

Does SEP RA maximum contribution change due to what?

The calculation for a self-employed person for a SEP IRA contribution is different than the straight 25% of net income.

 

Per the IRS:

Plan compensation for a self-employed individual

To calculate your plan compensation, you reduce your net earnings from self-employment by:

  • the deductible portion of your SE tax from your Form 1040 return, Schedule 1, on the line for deductible part of self-employment tax, and
  • the amount of your own (not your employees’) retirement plan contribution from your Form 1040 return, Schedule 1, on the line for self-employed SEP, SIMPLE, and qualified plans.

You use your plan compensation to calculate the amount of your own contribution/deduction. Note that your plan compensation and the amount of your own plan contribution/deduction depend on each other - to compute one, you need the other (this is a circular calculation). One way to do this is to use a reduced plan contribution rate. You can use the Table and Worksheets for the Self-Employed (Publication 560) to find the reduced plan contribution rate to calculate the plan contribution and deduction for yourself.

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dmertz
Level 15

Does SEP RA maximum contribution change due to what?

For a self-employed individual, the maximum contribution is 20% of net earnings, not 25%, because the SEP contribution itself effectively reduces the compensation on which the base rate of 25% is being applied.

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