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SEP IRA Contribution for a Sole Proprietor
The information provided below is very complicated. Sit recommends consulting a tax professional.
As a sole proprietor, you must calculate your net income and submit IRS Schedule C (“Profit or Loss from Business”) with your IRS Form 1040 (“U.S. Individual Income Tax Return”). Because your business’s net income will fall when you make a SEP IRA contribution for yourself, be sure to follow these 3 steps when calculating your SEP IRA contribution:
- First, determine your modified net business income (MNBI). Subtract one-half of your self-employment tax from your net income. This is your MNBI.
Net Income – (Self-Employment Tax ÷ 2) = Modified Net Business Income (MNBI)
- Second, determine your adjusted contribution rate. Take your contribution percentage rate and divide it by the sum of 100% plus your contribution rate. Mathematically, it looks like this:
contribution rate (%) = Adjusted Contribution Rate (%)
100% + contribution rate (%)
- Third, determine the dollar amount of your SEP IRA contribution. Multiply your MNBI by the Adjusted Contribution Rate.
MNBI x Adjusted Contribution Rate = SEP IRA Contribution
Example
Lisa, a sole proprietor, files an IRS Schedule C and wants to give herself a 10% SEP IRA contribution.
The Calculation:
| $100,000 | Lisa's net income (from IRS Schedule C) |
| -$7,065 | One half of Lisa’s self-employment tax ($14,130 ÷ 2) |
| =$92,935 | Modified Net Business Income (MNBI) |
| X 9.0909% | Lisa’s Adjusted Contribution Rate (10% / (100%+10%)) |
| =$8,449 | Lisa’s 10% SEP IRA contribution (deduction is taken on her IRS Form 1040) |
Check the Math:
| $100,000 | Lisa's net income (from IRS Schedule C) |
| -$7,065 | One half of Lisa’s self-employment tax ($14,130 ÷ 2) |
| -$8,449 | Lisa’s SEP IRA contribution |
| =$84,486 | Compensation amount subject to SEP IRA contribution rate |
| X 10% | SEP IRA contribution rate |
| =$8,449 | Lisa’s 10% SEP IRA contribution (deduction is taken on her IRS Form 1040) |
SEP IRA Contribution Calculation Worksheet for a Sole Proprietor
| Step 1 | Obtain your net income from Schedule C | $ |  |
| Step 2 | Subtract one half of your self-employment tax | — $ | |
| This is your Modified Net Business Income (MNBI) | $ | |
|
| Step 3 | Multiply your MNBI by your desired Self-Employed Adjusted Contribution Rate (see table below) | X | |
| This is your SEP IRA contribution | $ | |
Desired Self-Employed Adjusted Contribution Rate
Contribution Rate | Adjusted Contribution Rate (%) | Adjusted Contribution Rate (Decimal) |
| 1% | 0.9901% | 0.009901 |
| 2% | 1.9608% | 0.019608 |
| 3% | 2.9126% | 0.029126 |
| 4% | 3.8462% | 0.038462 |
| 5% | 4.7619% | 0.047619 |
| 6% | 5.6604% | 0.056604 |
| 7% | 6.5421% | 0.065421 |
| 8% | 7.4074% | 0.074074 |
| 9% | 8.2569% | 0.082569 |
| 10% | 9.0909% | 0.090909 |
| 11% | 9.9099% | 0.099099 |
| 12% | 10.7143% | 0.107143 |
| 13% | 11.5044% | 0.115044 |
| 14% | 12.2807% | 0.122807 |
| 15% | 13.0435% | 0.130435 |
| 16% | 13.7931% | 0.137931 |
| 17% | 14.5299% | 0.145299 |
| 18% | 15.2542% | 0.152542 |
| 19% | 15.9664% | 0.159664 |
| 20% | 16.6667% | 0.166667 |
| 21% | 17.3554% | 0.173554 |
| 22% | 18.0328% | 0.180328 |
| 23% | 18.6992% | 0.186992 |
| 24% | 19.3548% | 0.193548 |
| 25% | 20% | 0.2 |