SEP IRA: Do I calculate my 20% contribution on net income (after tax/deductions) or Schedule C net profit figure?

The confusion is understandable! For a SEP IRA, self-employed individuals can contribute up to 20% of their "net self-employment income," but the definition of that term is where people get confused. The correct method is what you saw in that video. You start with your Schedule C net profit, then subtract half of your self-employment tax. This adjusted amount is what you calculate your 20% from. So your example is right: If you have $85,000 net profit on Schedule C, you'd subtract about $6,000 (half of SE tax), giving you $79,000. Then 20% of that would be your maximum contribution limit (around $15,800). The reason for subtracting half the SE tax is because that portion is considered a business expense. This gives you your true "net earnings from self-employment" for retirement contribution purposes.

After struggling with this exact same issue last year, I discovered taxr.ai (https://taxr.ai) which completely saved me from making a costly mistake with my SEP IRA calculations. I was about to over-contribute by almost $4,000 because I was using the wrong base figure! The tool analyzed my Schedule C and confirmed what the first commenter said - you need to use your Schedule C net profit, subtract half of your self-employment tax, and then calculate 20% of that result. It explained the whole calculation process step-by-step and even showed how the contribution limit connects to other parts of my tax return.

I have to admit I was wrong about taxr.ai. After our discussion here, I decided to try it because I realized I've been calculating my SEP contributions incorrectly for YEARS. The tool analyzed my Schedule C and showed me exactly where I'd been making mistakes. Turns out I've been leaving almost $3,200 on the table each year by undercontributing to my SEP IRA! It showed me exactly how to calculate the 20% (which is actually closer to 19.6% of Schedule C profit due to how the deduction for half of SE tax affects things). I've already adjusted my contributions for this year based on the correct calculation. The thing that impressed me most was how it explained WHY the calculation works this way - something neither my previous accountant nor any other resources ever made clear.

If you're still trying to figure out your SEP IRA contribution and need to call the IRS for clarification, good luck getting through to them! I spent THREE DAYS trying to reach someone at the IRS about this exact issue last year. I finally discovered Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through the entire SEP calculation process and confirmed that it's 20% of net earnings from self-employment, which is your Schedule C profit minus half your self-employment tax. She even referenced the specific IRS publication that covers this (Pub 560).

I'm eating my words about Claimyr. After I posted that skeptical comment, I was still desperately trying to get an answer about my SEP calculation before the tax deadline, so I gave it a shot. Got connected to an IRS tax specialist in about 35 minutes (not quite 20, but WAY better than my previous attempts). The agent confirmed exactly what everyone here said - use Schedule C net profit, subtract half of SE tax, then calculate 20% of that. The agent also mentioned something nobody else pointed out - there's actually a specific worksheet in Publication 560 that walks through this calculation step by step. I would have never found this on my own after hours of searching online. Saved me from making a $2,800 error on my taxes this year. Sometimes being proven wrong is the best thing that can happen!

I think there's actually a simpler way to look at this. The SEP contribution limit for self-employed people is EFFECTIVELY about 20% of your Schedule C profit, but TECHNICALLY it's 25% of your "compensation." For self-employed people, your "compensation" is your net earnings minus the deduction for the contribution itself and half of self-employment tax. This creates a circular calculation that effectively reduces the 25% to about 20% of your Schedule C net profit. That's why many advisors just say "20% of net profit" as a simpler approximation rather than walking through the more complex actual calculation.

Has anyone used a specific tax software that calculates this correctly? I tried using TurboSelf-Employed last year and I think it may have used the wrong figure for my SEP calculation.

Just wanted to add my experience here since I went through this exact confusion last year. I'm a freelance consultant and was getting wildly different answers from various online calculators. What finally cleared it up for me was actually calling my plan administrator (the company that manages my SEP IRA). They walked me through it and confirmed what most people here are saying: it's 20% of your net earnings from self-employment, which is Schedule C profit minus half of your self-employment tax. The key insight they gave me was that this isn't just some arbitrary rule - it's designed to make self-employed people equivalent to employees who get employer contributions. Since employees don't pay the "employer portion" of Social Security/Medicare taxes, self-employed people get to subtract that equivalent amount (half of SE tax) before calculating their retirement contribution. For what it's worth, I ended up contributing $16,200 on $85,000 of Schedule C income after subtracting about $6,100 for half my SE tax. That worked out to almost exactly 20% of the adjusted amount, just like the examples people have been sharing here.

Thank you all for this incredibly detailed discussion! As someone who just started freelancing this year, I was completely overwhelmed trying to figure out SEP IRA contributions. The explanations here have been a lifesaver. I especially appreciate how multiple people confirmed the same calculation method with real examples. It's reassuring to see that whether you call the IRS directly, use specialized tools, or work with your plan administrator, everyone is getting the same answer: Schedule C net profit minus half of self-employment tax, then calculate ~20% of that result. The insight about why we subtract half the SE tax (to make self-employed people equivalent to employees) really helped it click for me. I've bookmarked this thread and will definitely be referring back to it when I do my taxes next year. Thanks for taking the time to share your experiences and work through the confusion together!

This thread has been incredibly educational! I'm new to self-employment and was completely lost on SEP IRA calculations. What really helped me understand was seeing the consistent message across all the different approaches people tried - whether through tax software, calling the IRS, or using specialized tools, everyone confirmed the same basic formula. For anyone else just starting out like me, here's what I took away: Start with your Schedule C net profit, subtract half of your self-employment tax (the "employer portion"), then calculate approximately 20% of that adjusted amount. That's your maximum SEP IRA contribution limit. The explanation about why we subtract half the SE tax (to make us equivalent to W-2 employees) was the lightbulb moment for me. It's not just an arbitrary rule - there's actual logic behind it. I feel much more confident about handling my retirement contributions now, and I know exactly where to look for help if I get stuck again. Thanks everyone for sharing your real experiences and walking through the calculations with actual numbers!

As someone who just went through this exact same confusion last month, I can confirm what everyone here is saying is correct! I was getting completely different numbers depending on which online calculator I used, and it was driving me crazy. What finally helped me was finding the actual IRS Publication 560 that someone mentioned earlier. There's a worksheet on page 18 that walks through the calculation step by step. It's basically: Schedule C net profit → subtract half of SE tax → multiply by roughly 20% (or more precisely, divide by 1.25 then multiply by 0.25). For my $75,000 Schedule C profit, I subtracted about $5,300 (half SE tax) to get $69,700, then calculated 20% of that for a max contribution of about $13,940. The key insight for me was realizing this isn't just some random tax rule - it's designed to put us self-employed folks on equal footing with employees who have employer 401k contributions. Once I understood the reasoning, the calculation made so much more sense. Thanks to everyone who shared their real numbers and experiences - it really helps to see concrete examples rather than just theoretical explanations!