How to Calculate SEP IRA Contribution for the Self-Employed

To calculate a SEP IRA contribution for a self-employed person, take the net profit from Schedule C, subtract half of your self-employment tax, and multiply the result by 20%. Your maximum contribution is that figure or the annual dollar cap, whichever is smaller. The cap is $72,000 for 2026 and $70,000 for 2025.¹

The Numbers You Need First

Every input comes from your business tax return. Start with line 31 of Schedule C (Form 1040), which is your net profit after allowable expenses.² Then turn to Schedule SE, where self-employment tax is computed at 15.3% (12.4% for Social Security plus 2.9% for Medicare) applied to 92.35% of your net earnings.³

Half of that self-employment tax is the piece you subtract from net profit. It represents the employer-equivalent share of the tax, and you also deduct it as an adjustment to income on Schedule 1.² Net profit minus half of self-employment tax equals your plan compensation, and that number drives everything downstream.

Why the Rate Is 20 Percent, Not 25

An employer sponsoring a SEP can contribute up to 25% of an employee’s compensation. When you are the employee and the employer both, the effective rate for your own account works out to about 20%. The reason is circular: the contribution reduces the earnings figure it is calculated from. The IRS resolves the loop by using a reduced rate in Publication 560.⁴

A second cap limits how much compensation you can plug into the formula. For 2026, only the first $360,000 of compensation counts; for 2025, only the first $350,000.¹ Anything above that ceiling is disregarded.

The Six-Step Calculation

Publication 560 lays out the sequence:⁴

Pull net profit from Schedule C, line 31.
Compute self-employment tax on Schedule SE and take half.
Subtract that half from net profit. The result is your plan compensation.
Multiply plan compensation by 20% (or by a lower reduced rate if your plan sets a percentage below the 25% maximum).
Compare the product to the year’s dollar cap.
The smaller of the two is your maximum contribution.

Example: Moderate Income

Assume 2026 net profit of $120,000. Self-employment tax runs roughly $16,956 (15.3% of 92.35% of $120,000), so half is $8,478. Subtract $8,478 from $120,000 for plan compensation of $111,522. Multiply by 20% to get $22,304. That sits well below the $72,000 cap, so $22,304 is the maximum contribution.

Example: High Income Where the Ceiling Bites

Now assume net profit of $450,000. After subtracting half of self-employment tax, plan compensation might land near $430,000, but only the first $360,000 counts for 2026.¹ Twenty percent of $360,000 is $72,000, which equals the dollar cap. Maximum contribution: $72,000.

A Quick Check on Your Arithmetic

The IRS offers a verification step. Subtract your calculated contribution from your plan compensation, then multiply the remainder by the plan’s full rate (25% at the maximum). If the product equals the contribution you calculated, the numbers reconcile.⁵ If they don’t, run each step again before you fund the account.

What If Your Business Has a Loss

A net loss on Schedule C produces negative net earnings, and negative earnings cannot support a SEP contribution. There is no positive base for the 20% to act on.⁶ SEP plans do not require annual contributions, so skipping a loss year creates no compliance problem for the plan itself.

When You Have to Deposit It and Where It Goes on the Return

The deposit deadline is the due date of your federal income tax return, including extensions.⁶ For a sole proprietor filing Form 1040, that is April 15 of the following year, or October 15 with a six-month extension. You can even establish a brand-new SEP by the extended deadline and still contribute for the prior tax year.

The contribution is deducted on line 16 of Schedule 1 (Form 1040), where it reduces adjusted gross income.⁷ It does not belong on Schedule C, because the IRS treats it as a personal adjustment rather than a business expense.⁵

If you do not yet have a plan, you can adopt one using IRS Form 5305-SEP, a prototype document from a financial institution, or an individually designed plan, then open the SEP IRA account itself at that institution.⁶ Form 5305-SEP is the simplest option for a sole proprietor with no other qualified retirement plans, but it cannot be used if you maintain another qualified plan or want a non-calendar plan year.

If Your Business Has Employees

The 20% figure describes what you can put in for yourself. Once you have employees, the percentage you contribute for yourself must apply equally to every eligible employee. You cannot give yourself 20% and staff 5%; the rate is uniform.⁸

An employee is generally eligible if all three conditions are met:⁹

At least 21 years old.
Worked for the business in at least three of the last five years. Any amount of work in a year counts; there is no minimum-hours requirement.
Earned at least a minimum amount of compensation from the business that year. The threshold is adjusted periodically and was $750 as of 2024.

Your plan document can loosen these rules but cannot tighten them, and the eligibility conditions you set apply to you as well.⁹ Because a higher percentage for yourself pulls every eligible worker’s contribution up with it, the equal-rate rule is worth pricing into the decision before you settle on a number.

1
Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
2
Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
3
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
4
Internal Revenue Service. Publication 560 (2024), Retirement Plans for Small Business
5
Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
6
Internal Revenue Service. Simplified Employee Pension Plan (SEP)
7
Internal Revenue Service. 2025 Schedule 1 (Form 1040) – Additional Income and Adjustments to Income
8
U.S. Department of Labor. SEP Retirement Plans for Small Businesses
9
Internal Revenue Service. Retirement Plans FAQs Regarding SEPs