Turbo Tax does not allow me to add full self-employment retirement deduction

[VolvoGirl]

You have to pay the self employment tax on your Schedule C Net Profit.  Then you get the 401K deduction off your personal income on the 1040.  So it reduces the regular income tax but not the self employment tax.  

[dmertz]

For a sole proprietor:

Compensation = Net earnings = Net profit minus the deductible portion of self-employment taxes.

See page 5, "Compensation" and page 6, "Net earnings from self-employment" in IRS Pub 560.

[gawdiaq23]

According to page 6:

Net earnings from self-employment. For SEP and
qualified plans, net earnings from self-employment are
your gross income from your trade or business (provided
your personal services are a material income-producing
factor) minus allowable business deductions. Allowable
deductions include contributions to SEP and qualified
plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax.
Net earnings from self-employment don’t include items
excluded from gross income (or their related deductions)
other than foreign earned income and foreign housing
cost amounts.

For the deduction limits, earned income is net earnings
for personal services actually rendered to the business.
You take into account the income tax deduction for the deductible part of self-employment tax an

contributions to the plan made on your behalf when figuring net earnings.

Net earnings include a partner's distributive share of
partnership income or loss (other than separately stated
items, such as capital gains and losses). They don’t include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net
earnings from self-employment if they are paid for services to or for the partnership. Distributions of other income
or loss to limited partners aren't net earnings from self-employment.
For SIMPLE plans, net earnings from self-employment
are the amount on line 4 of Schedule SE (Form 1040),
Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for yourself.

Nothing here states that the net income has to be reduced by the Self-employment tax.

[VolvoGirl]

You just posted it above....

You take into account the income tax deduction for the deductible part of self-employment tax 

You are deducting 50% of the SE tax (the employer's half) on Schedule 1 line 15 which goes to 1040 line 10.  You only are deducting half of the tax.  

[gawdiaq23]

I don't understand how deducing taxes happens before determining income works. That line in the definition is not clear in that determination. 

[dmertz]

Because one-half of the self-employment tax paid is considered to be the employer's portion of the tax (SE tax covers Social Security and Medicare taxes which are half paid by the employer and half paid by the employee), net profit must be reduced by the employer's portion of SE tax to determine the amount that is considered to be the self-employed individual's compensation.

[gawdiaq23]

But where is it explained that self-employment tax is supposed to be deducted from Earned Income before any deductions (like 401k)?

[dmertz]

As VolvoGirl indicated, it's in the text that you quoted from IRS Pub 560:

For SEP and qualified plans, net earnings from self-employment are your gross income from your trade or business (provided your personal services are a material income-producing factor) minus allowable business deductions. Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax.

This derives from section 1402(a)(12) of the tax code which excludes from net earnings one-half of self-employment tax.

[gawdiaq23]

"Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for the deductible part of your self-employment tax."

This still does not explain why the deduction from self-employment tax has to be taken before the qualified plans one. Why can't I deduct the full amount of gross income from qualified plans before determining how much it has to go through self-employment tax?

The order of operations isn't clear. 

[dmertz]

We've explained and provided supporting references several times.  Contributions to an individual 401(k) are limited to compensation (tax code section 415(c)(1)(B)).  Compensation is defined as net earnings (section 401(c)(2)).  Net earnings are net profit minus the employer-equivalent portion of self-employment taxes (section 1402(a)(12)).  These references clearly specify the order of operations (dependencies) which results in the 401(k) contribution being limited to the net profit minus the deductible (employer) portion of self-employment taxes.