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It is based on net earnings minus one half of your self employment tax.
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Neither. For a sole-proprietor it's 20% of net earnings. Net earnings are net profit minus the deductible portion of self-employment taxes.
Thank you. Do capital gains play into the picture at all? In other words, if I have substantial capital gains, can a portion of those gains add to the amount I can contribute to a SEP?
No. The calculation depends only on your business income.
Got it. Thank you again. One last thing- if I exceed the limit, what happens to the excess?
Unless corrected, excess SEP contributions are subject to a 10% excess-contribution penalty reported on Form 5330. TurboTax does not support Form 5330.
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