TT calculates a maximum SEP limit that is less than 25% of my Self Employed Net Income. Why?

[lisaasa]

I'm using the Net Income amount reported in "Wages and Income" -->"Business Items"--> "Business Income and Expenses" (it shows the number net based on my 1099 Income - Business Expenses), then multiplying that by 25%. TT calculated a maximum SEP contribution as a number that is only 18.6% of my Net Income (in section "Wages and Income"--> "Business Items" --> "Business Deductions and Credits" --> "Self Employed Retirement Plans").  How is it calculating my maximum SEP? I did max out my Roth IRA. Does that impact it?

[ThomasM125]

Since you are self-employed, you must subtract your deductible self-employment tax from your net business income to arrive at the amount to apply the 25% allowance to. You can find your self-employment tax deduction on line 15 of schedule 1 on your tax return.

There are limits to making ROTH IRA contributions depending on your income and other contributions, but that wouldn't limit your SEP contribution amount.

You can view your form 1040  and schedule 1 to 3 while working in the online version of TurboTax by following these steps:

While working on your return in the Federal section of TurboTax:

   1.  Choose the Tax Tools icon on your left menu bar

   2.  Tools

   3.  View Tax Summary

   4.  Choose the Preview my 1040 on your left menu bar

[dmertz]

As special calculation is required because the SEP contribution itself, which is an employer contribution, reduces your compensation which is then multiplied by 25%.  Because of this, your SEP contribution is limited to 20% of net earnings.  Net earnings are net profit minus the deductible portion of self-employment taxes.