Keogh Calculation Question

[Splash232003]

I have a profit sharing Keogh account. On some websites, I've seen the following formula for calulating sole proprietorship retirement accounts: 25*(Earned Income = Net Profit – 1/2 of Self-Employment Tax – Contribution).

When Turbotax calculates my maximum deduction, it uses .20 , and doesn't subtract my Contribution Amount. The formula above produces a smaller contribution than Turboxtax. Should I be using Turbotax's method?

Thanks,

[MinhT1]

In fact, mathematically, the two formulas should give the same result.

And you can use the TurboTax method.

[dmertz]

The 25% factor applies to earned income (E) minus the profit-sharing contribution (C).  The result is that the maximum employer contribution is 20% of the earned income.  Doing a bit of algebra:

C = 0.25 * (E - C)

4 * C = E - C

5 * C = E

C = 0.20 * E

More generally, the calculation described in IRS Pub 560 Chapter 6 for a base percentage P is:

C =E * P / (1+ P)

So for a base percentage of 25%:

C = E * 0.25 / (1 + 0.25)

C = E * 0.25 / 1.25

C = E * 0.20

This calculation is described in Chapter 6 of IRS Pub 560.

[Splash232003]

Thanks for the reply. I see that this works if C in the (E-C) section of the formula is (.20*E.) I was assuming that it C in the formula was .25*C

[Splash232003]

Thanks.  It does work if we use the formula in the previous reply.