Traditional SEP Contributions

[Farindola]

I do not understand TurboTax's calculation of my max contribution. The IRS says I may contribute 25% of my net, yet which is twice what TurboTax is calculating. I have already made the contribution and TurboTax is telling me to withdraw the difference or get penalized. Any help is appreciated. Thank you.

[dmertz · Accepted solution]

The base rate of 25% must be adjusted to 20% for a self-employed individual because the SEP contribution is an employer contribution that effectively reduces net earnings.  The maximum SEP contribution for a self-employed individual is 20% of net earnings.  Net earnings are net profit minus the deductible portion of self-employment taxes.

Excess SEP contributions are subject to a 10% excess-contribution penalty on Form 5330.  TurboTax does not support Form 5330.