Calculate Your Contributions

Example:

A sole proprietor wishes to contribute 25% to a SEP for himself and his employees. His net earnings from Schedule C for 2004 are $105,000. The employee's compensation and the SEP contribution made by the employer on the employee's behalf have already been reflected in net earnings. Assume a 25% desired contribution rate. One-half of self-employment tax calculated on Form 1040 schedule SE and shown on line 30 of the Form 1040 is $6,856. Determine the maximum deduction for contributions on behalf of the sole proprietor as follows:

(4) Enter rate determined from the worksheet above (.25/1.25): 20.00%

(5) Net earnings: $105,000 (employee SEP contributions have been factored into this number, but not the sole proprietor's contribution).

(6) Enter the deduction for self-employment tax from line 30, Form 1040: $6,856.

(7) Subtract Step 6 from Step 5 and enter the result: $98,144.

(8) Multiply Step 7 by Step 4 and enter the result: $19,628.

(9) Enter the smaller of Step 8 or $41,000 in 2004: $19,628.

This is his maximum deductible contribution. Enter the deduction on line 32, Form 1040. $19,628 Proof: $19,628/($98,144 -$19,628) = 25%.