For SEP IRA, is my maximum deduction based on self-employment net income or net income minus SEP contributions?

The SEP IRA contribution formula is definitely confusing! The short answer is that your maximum contribution is based on your net self-employment income AFTER subtracting your SEP contribution. This does create that circular relationship you're describing. The actual formula for self-employed individuals is that you can contribute up to 20% of your net self-employment income after deducting the SEP contribution itself (not 25% as many people think). The formula works out this way because the contribution reduces your income, which then reduces the base for calculating your contribution. The IRS provides worksheets for this calculation in Publication 560. For your $85,000 example, the maximum contribution would actually be closer to $17,000 (not simply 25% of $85,000). The math works out this way because if you contribute $17,000, your net income becomes $68,000, and $17,000 is 20% of $85,000 (or approximately 25% of $68,000).

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To make this SEP calculation simpler, here's a quick formula that works for most self-employed people: Maximum SEP contribution = Net profit × 0.20 This accounts for the circular reference problem without making your head explode. For most small business owners and freelancers, this gets you close enough without driving yourself crazy with the precise math.

Does anyone know if there's a way to just check what my maximum SEP contribution is based on last year's tax return? I'm trying to max out my contribution for 2024 but don't want to over-contribute and deal with excess contribution penalties.

Just wanted to add my experience with this exact same confusion! I'm a freelance graphic designer and went through this same headache last year. The key breakthrough for me was understanding that the IRS uses "compensation" differently for employees vs. self-employed people. For employees, compensation is their salary BEFORE the employer makes SEP contributions (hence 25%). But for us self-employed folks, our "compensation" is net earnings AFTER we deduct our own SEP contribution, which creates that circular math nightmare you described. Here's what helped me: I used the worksheet in IRS Publication 560 (Worksheet 2-1) which walks through this step by step. It's still confusing, but at least it's official IRS guidance. For your $85K example, the actual max would be around $17,000 as others mentioned. The formula essentially works out to: Maximum = Net Profit ÷ 1.25, which gives you that ~20% effective rate. One tip: if you're planning quarterly estimated taxes, just budget around 18-20% of your net profit for SEP contributions to be safe. You can always true up at year end once you know your exact numbers.