A SEP IRA has no employee deferral at all — only an owner/employer contribution, capped at a rate that works out differently than the “25%” figure suggests once the self-employed math is worked through.
How it works
For an unincorporated self-employed owner, the contribution’s own deductibility creates a circular calculation: the stated 25% rate nets to an effective 20% of net self-employment earnings (after the deduction for half of self-employment tax), capped at the annual dollar ceiling.
What this does not include
A corporation’s SEP calculation is simpler — the stated 25% applies directly to W-2 compensation with no circular adjustment. This calculator covers the unincorporated self-employed case specifically, per IRS Publication 560’s worksheet.
How to use this calculator
- Enter net self-employment earnings after the deduction for half of self-employment tax.
- Enter the current year’s SEP dollar ceiling.
Frequently asked questions
Why is the effective rate 20%, not 25%?
Because the SEP contribution is deducted from the same net earnings it’s calculated against — working through that circular math turns a stated 25% rate into an effective 20% for an unincorporated business.
Can employees also have a SEP IRA?
Yes — a business with employees must generally contribute the same percentage for eligible employees as for the owner, unlike a Solo 401(k), which is only available to a business with no eligible employees.
Is a SEP IRA better than a Solo 401(k)?
Not universally — a Solo 401(k) also allows an employee deferral on top of the employer contribution, often producing more total room at the same income; this site’s Solo 401(k) calculator computes that comparison.
