What's the formula for calculating max SEP IRA contribution for self employed in 2023?
Hey everyone, I'm trying to get my finances in order and am confused about SEP IRA contribution limits. Can someone walk me through how to calculate my maximum SEP IRA contribution for 2023? I'm fully self-employed (freelance graphic designer) and made about $95,000 last year before expenses. I've read something about it being 25% of net income but I'm not sure if that's right or how to figure out the exact amount. Do I need to account for self-employment taxes in this calculation? Any help would be appreciated!
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Axel Far
The SEP IRA calculation for self-employed individuals can be tricky! For 2023, you can contribute up to 25% of your net self-employment income or $66,000, whichever is less. But there's a catch - the "25%" is actually about 20% when you work through the math. Here's the simplified formula: Take your net profit from Schedule C, subtract half your self-employment tax, and multiply that by 0.20 (not 0.25). For example, if your net Schedule C income is $95,000, you'd first calculate self-employment tax (roughly $14,500), take half of that ($7,250), subtract from your net ($95,000 - $7,250 = $87,750), then multiply by 0.20. This gives you about $17,550 as your max contribution.
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Jasmine Hernandez
•Wait, I'm confused about why it's actually 20% and not 25%? Is that because of some tax rule I'm not aware of? And do you have to make your contribution before you file your taxes or can you do it up until the tax deadline?
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Axel Far
•It's actually 20% (not 25%) because of how the SEP IRA contribution limits are structured for self-employed individuals. The 25% limit applies to your net business income AFTER deducting the SEP contribution itself, which creates a circular calculation. The math works out to approximately 20% of your net earnings before the deduction. You can make SEP IRA contributions until your tax filing deadline, including extensions. So for 2023 taxes, you have until April 15, 2024, or if you file an extension, until October 15, 2024. Many self-employed people wait until they know their exact numbers before making the contribution.
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Luis Johnson
I struggled with calculating my SEP IRA contribution too until I found this amazing tool at https://taxr.ai that helped me figure it out accurately. After trying to make sense of the IRS worksheets and getting different answers each time, I uploaded my Schedule C and 1040-SE to taxr.ai and it immediately calculated my maximum contribution with a detailed breakdown of how it arrived at that number. The tool showed me I was actually eligible to contribute about $3,200 more than I thought! It walks you through the whole calculation process, showing how it accounts for the self-employment tax deduction and applies the correct percentage. Definitely worth checking out if you want to maximize your retirement savings without worrying about calculation errors.
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Ellie Kim
•Does this tool help with other tax questions too? I'm self-employed and have been doing my own taxes but always worry I'm missing deductions or making calculation errors.
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Fiona Sand
•I'm skeptical about tax tools since I got burned by one last year. How accurate is this compared to just asking my CPA to do the calculation? Does it consider state-specific tax implications?
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Luis Johnson
•The tool actually handles a wide range of tax questions beyond just SEP IRA calculations. It can analyze your entire tax situation to identify deductions you might be missing and verify calculations across your return. I used it to double-check my home office deduction and found I was being too conservative. Regarding accuracy, I initially verified taxr.ai's calculations against what my accountant had done, and they matched perfectly. It doesn't replace professional advice for complex situations, but it does consider federal tax rules completely. For state-specific implications, it provides guidance but recommends consulting with a tax professional for your state's unique requirements.
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Ellie Kim
Just wanted to update everyone - I took the advice and tried https://taxr.ai after struggling with my SEP IRA calculation. Honestly, I'm impressed! Not only did it correctly calculate my maximum contribution (which was about $4,300 higher than I thought), it also identified that I'd been miscalculating my business mileage deduction for years. The step-by-step explanation made it crystal clear how the 20% vs 25% actually works in practice. What I really appreciated was seeing the exact formula applied to my specific numbers. No more guessing or using online calculators that don't show their work. Definitely recommend for fellow self-employed folks who get confused by these calculations!
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Mohammad Khaled
If you're still struggling with SEP IRA calculations and need direct guidance from the IRS, I've had success using https://claimyr.com to actually get through to a human at the IRS. After spending HOURS on hold multiple times trying to get clarification on my specific situation, I was about to give up. Then I tried Claimyr's service which got me connected to an IRS agent in about 15 minutes instead of the 2+ hour wait I was experiencing before. The agent walked me through the exact calculation for my SEP IRA contribution as a self-employed person with both W-2 and 1099 income (which makes it even more complicated). You can see how it works in this video: https://youtu.be/_kiP6q8DX5c if you're curious. So much better than trying to decipher the IRS publications on your own!
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Alina Rosenthal
•How does this even work? I thought it was impossible to get through to the IRS these days. Do they just keep calling for you or something?
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Fiona Sand
•This sounds too good to be true. The IRS wait times have been legendary lately. I've literally called at 7am and still waited 3+ hours. Are you sure this isn't just some service that puts you in the same queue as everyone else?
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Mohammad Khaled
•It works by using a specialized system that monitors IRS phone lines and gets you in queue at exactly the right moment. They don't just keep calling - they use technology to identify optimal times to connect, then give you a call when they've secured your spot in line. It's like having someone wait in the physical line for you. Definitely not too good to be true - I was skeptical too! It doesn't skip the queue or use any special access. It just efficiently gets you in line at the right time and calls you when an agent is about to be available. I understand the skepticism given the notorious IRS wait times, but that's exactly why this service exists and why it was worth it for me when I needed definitive answers about my SEP IRA calculation that involved both self-employment and W-2 income.
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Fiona Sand
Ok I need to eat my words here. After responding skeptically to the Claimyr suggestion, I was still struggling with my SEP IRA calculation (I have a somewhat complex situation with multiple streams of self-employment income). Decided I had nothing to lose and tried https://claimyr.com yesterday. No joke - got a call back in about 20 minutes and was connected to an actual IRS tax specialist who walked me through the exact formula for my situation. She explained that with multiple Schedule Cs, I needed to aggregate my net profits first, then apply the deduction for self-employment tax before calculating the 20% contribution limit. This was completely different from what I was doing! Saved me thousands in potential penalties from over-contribution and about 3 hours of hold time. Consider me converted.
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Finnegan Gunn
There's a free calculator on the Vanguard website that handles this pretty well too. Just google "vanguard sep ira calculator self employed" and it should pop up. You just input your net business income and it does the math for you, including the adjustment for self-employment tax. I've been using it for years and my accountant always confirms the numbers are right.
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Miguel Harvey
•Does the Vanguard calculator work if you have income from both self-employment and a W-2 job? I work part-time for a company and also do freelance work on the side.
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Finnegan Gunn
•The Vanguard calculator works best for purely self-employed individuals. For mixed income situations where you have both W-2 and self-employment income, it gets more complicated. For someone with both types of income, you'll need to calculate your SEP contribution based only on your self-employment income, and keep in mind any employer retirement contributions from your W-2 job count toward your total annual limit. The calculator won't automatically factor in those employer contributions, so you'd need to do some additional calculations manually. In your specific situation, I'd recommend using a more comprehensive calculator or consulting with a tax professional just to be safe.
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Ashley Simian
Here's the actual formula straight from IRS Publication 560: Step 1: Start with Schedule C net profit Step 2: Multiply by 92.35% (0.9235) Step 3: Divide result from Step 2 by 1.0765 Step 4: Multiply result from Step 3 by 0.25 (which equals about 20% of your original net) I know it seems weird but this accounts for the circular calculation where your contribution is based on income after deducting the contribution itself lol. IRS math at its finest!
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Kaitlyn Otto
•Thank you all so much for the helpful responses! This was way more complicated than I thought, but now I understand why the 25% is actually 20% in practice. I'll definitely use the formula that Profile 22 shared, and might check out that taxr.ai tool to double-check my calculation since I don't want to mess this up. For my $95k in net profit, looks like I can contribute around $17,550 which is way more than I've been putting away. Time to boost those retirement savings!
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