SEP IRA Calculator

For a sole proprietor or single-member LLC, a SEP IRA calculator does not start with Schedule C net profit and apply 25% to it. It starts a step below that, and the order of operations is what trips most people up. The IRS formula for self-employed SEP contributions runs through net earnings from self-employment, not gross profit, and that one detail throws off most back-of-the-napkin math.

Here is the chain. You take Schedule C line 31 (net profit). You subtract the deductible half of self-employment tax, which lands on Schedule 1, line 15 of your Form 1040. What is left is your net earnings from self-employment. The SEP IRA calculator then applies the self-employed contribution rate of 20% (technically 25/(1+25)% = 0.20) to that net SE earnings figure to arrive at the maximum deductible SEP contribution. The result is what you can put into the account, and the same number flows as a deduction onto Schedule 1, line 16 of the 1040.

A worked example. Say your Schedule C shows $100,000 of net profit. Self-employment tax on 92.35% of that profit runs about $14,130 (15.3% rate, with a small reduction because SE tax is computed on 92.35% of net profit, not the full amount). Half of SE tax, the deductible portion, is roughly $7,065. So net SE earnings come out to about $92,935. A 20% contribution rate on that is approximately $18,587. That is your SEP IRA contribution ceiling for the year, and the same $18,587 lands as a deduction on Schedule 1, line 16.

Most online SEP calculators use 25% — they’re wrong for sole props by about 20% of the contribution. If a calculator asks you for Schedule C net profit and then multiplies by 0.25, the number it gives you will be roughly 25% too high. Fund that amount and you have an excess SEP contribution to fix before October 15, which means a 6% annual excise tax on Form 5329 until you pull it back out. We see this every spring during return season, and the cleanup is annoying because the broker has already invested the excess into the account.

For S-corp owners the math is completely different and the SEP IRA calculator should switch modes when you flag S-corp status. There is no SE tax on S-corp profits, no half-SE deduction, no 20% conversion. The SEP contribution is a flat 25% of W-2 box 1 wages, period. So a $100,000 W-2 salary supports a $25,000 SEP, while a $100,000 Schedule C net profit supports about $18,587. Same gross income, very different SEP ceiling, which is why a good calculator asks about entity type first and refuses to compute until you answer it.

One more variable. The 2026 SEP contribution cap is $72,000, and the compensation cap that flows into the calculation is $360,000. For an S-corp owner, the $72,000 cap is reached once W-2 compensation hits $288,000 (25% of $288,000 = $72,000); beyond that, more salary does not raise the SEP, and the $360,000 compensation cap is a separate, higher ceiling on the wages the 25% applies to. A SEP IRA calculator that does not enforce that ceiling will overstate your contribution at higher income levels. The compensation cap is set in IRS Notice 2025-67 for 2026 and updates each year, so any calculator without a year selector is suspect.

The other piece nobody talks about: if you have employees, the same percentage rate has to apply to all eligible employees, not just you. So if you contribute 18.587% of your own net SE earnings, you owe 18.587% of each eligible employee’s W-2 compensation to their SEP account too. A SEP IRA calculator built for the solo owner does not flag this. Eligible means age 21+, worked for you in three of the last five years, and earned at least $750 in 2026. Part-time staff can count. For multi-employee SEP plans, you really need a plan document review and likely a solo 401(k) comparison — reach out through our new client inquiry page and we will walk through it.

The formal plan-document side lives on Form 5305-SEP, the IRS prototype most one-person SEPs adopt. The form is two pages, you keep it on file, and the broker who holds the account also keeps a copy. You do not file Form 5305-SEP with the IRS. More on that at irs.gov/forms-pubs/about-form-5305-sep. If the calculator output looks higher than expected, recheck whether you fed it Schedule C net profit (wrong input for the 20% formula) or net SE earnings after the half-SE deduction (right input). Most of our business owner clients who run their own SEP IRA calculator end up off by exactly this step, and the fix is to back up one line on the worksheet.

One quick aside on the half-SE deduction step. The 92.35% factor inside the SE tax computation traces back to the original 1986 Tax Reform Act, when Congress wanted self-employed people to pay an equivalent burden to employees rather than a higher one. The 7.65% reduction roughly mirrors the employer’s deductible share of FICA. None of this matters to the SEP IRA calculator output, but it explains why net SE earnings always come out lower than gross Schedule C profit by a predictable percentage, and why the SEP IRA calculator math feels off until you walk through the IRS Publication 560 worksheet by hand. We make new business owner clients do exactly that the first year, just so they trust the numbers.

Two timing notes the calculator probably will not show you. First, SEP IRA contributions can be made up to the tax filing deadline including extensions (October 15 for most people), giving you longer to fund than a solo 401(k). Second, the deduction lands on the current return even if you fund in October the following year. That is unusual flexibility and one reason the SEP IRA stays popular despite the lower ceiling versus a solo 401(k).

The 25% rate everyone quotes is real, but it applies to W-2 wages from an S-corp or C-corp, not to Schedule C self-employment income. A SEP IRA calculator that knows what it is doing converts the 25% statutory rate into an effective ~18.587% rate when the contribution is coming off a sole prop’s net SE earnings. Here is why the formula bends, and why this matters for the dollars on your return.

The IRS rule is that the SEP contribution itself reduces the income base it is calculated from. That is circular, so the formula has to solve it algebraically. If x is the contribution and y is net SE earnings before the SEP contribution, then x = 0.25 (y – x). Solve for x and you get x = 0.20 y, which means the contribution equals 20% of net SE earnings. That is the 20% figure on the Schedule C side, and it pops out of the algebra cleanly.

Where does 18.587% come from? It is the same 20% applied one layer earlier. If you express the SEP contribution as a percentage of net profit (Schedule C line 31), before subtracting the half-SE deduction, you get roughly 18.587%. The exact number drifts a little with the SE tax wage base and the Social Security wage cap, but for most self-employed people in 2026 it lands between 18.5% and 18.59%. A SEP IRA calculator that shows the math layer-by-layer will display both numbers: 18.587% of net profit, equivalent to 20% of net SE earnings, equivalent to the IRS statutory 25% of comp.

The reason the IRS forces this two-step math is fairness across entity types. A W-2 employee contributes 25% of their salary, and that salary is already net of the employer’s payroll taxes. A sole proprietor’s Schedule C profit is not net of any payroll tax — SE tax has not been taken out yet. So the IRS subtracts the deductible half of SE tax first to put the sole prop on equal footing with the W-2 employee, then applies the 20% rate to the apples-to-apples income figure. Without that adjustment, sole props would effectively get a bigger SEP contribution than W-2 employees at the same gross income, which Congress did not want.

The surprising part: this means a sole prop with $100K of Schedule C profit gets a smaller SEP contribution than an S-corp owner with $100K of W-2 wages. Same gross income, different SEP ceiling, purely because of how SE tax interacts with the formula. That is one of the biggest arguments for the S-corp election once your profit climbs past about $80K-$100K, and it shows up in every tax strategy consulting conversation we have with sole props nearing that threshold. The SEP ceiling difference is on top of the SE tax savings, not instead of it, so the S-corp case compounds.

Some SEP IRA calculators try to skip the math and just show you the final dollar amount. That is fine for tax filing, but if you are running scenarios, the percentage view matters. You want to know what happens if you scale revenue up 30%, or what the contribution looks like after a $20K equipment deduction, or how SEP contributions interact with QBI deduction phaseouts. A calculator that only outputs a dollar figure makes scenario planning harder than it needs to be. The best ones let you adjust net profit on a slider and watch the SEP contribution move in real time.

The 18.587% number also explains why SEP contributions feel underwhelming at low income. A sole prop with $30,000 of net profit gets a SEP contribution of about $5,576. That is real money but not retirement-shifting money. The same income in a solo 401(k) supports the same $5,576 employer-side contribution plus up to $24,500 in employee deferral. The percentage formula bites hardest at the low end, where the employee deferral feature of a solo 401(k) becomes proportionally far more valuable.

Last note on the rate. A SEP IRA calculator can also let you contribute less than the maximum. You are not required to fund at 25% of compensation — that is the ceiling, not the floor. The plan document just has to say everyone gets the same percentage in any given year, but the percentage can change year to year. So if cash is tight, fund 10% across the board. If cash is flush, fund the max. That is allowed under the SEP rules in Form 5305-SEP and covered on the IRS page at irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps. Our broader tax strategy guides walk through scaling SEP contributions up or down depending on cash flow.

One angle a SEP IRA calculator can surface that nobody pencils in: how the percentage interacts with state tax. In New York City, where most of our clients live, the SEP deduction reduces both federal AGI and state taxable income. So a $20K SEP contribution at a combined 40% marginal rate is effectively an $8K cash refund, on top of the long-term retirement growth. A calculator that shows only the federal deduction understates the actual cash benefit. We run the full federal+state+NYC marginal stack for our business owner clients when sizing SEP versus solo 401(k), because the state-tax piece changes the answer in high-tax states.

Bottom line on the rate question: 18.587% is the same as 20% is the same as 25%. The numbers all come from the same formula viewed at different points in the calculation. A SEP IRA calculator built for self-employed people defaults to showing 20% of net SE earnings, because that matches the IRS worksheet you would fill out by hand in Publication 560. If your calculator labels its rate as 25% of Schedule C profit, click off it and find one that respects the algebra.

Yes, any SEP IRA calculator worth using for 2026 returns enforces the $72,000 annual limit and the $360,000 compensation cap that feeds it. Both numbers are in IRS Notice 2025-67 and apply to plan years starting in 2026. If a calculator stops at $69,000 or $66,000, it is using a prior year’s number and you should not trust the rest of the output. The cap moves with inflation each year, usually announced in late October or early November of the preceding year.

The $72,000 cap is the absolute ceiling on what can go into one person’s SEP IRA account in a year. It does not matter how much you earned. A sole proprietor with $500,000 of Schedule C profit cannot contribute more than $72,000. An S-corp owner with a $400,000 W-2 cannot either. The cap binds even though 25% of $400,000 would arithmetically be $100,000. The cap also binds across multiple SEPs — if you somehow have two SEP accounts open at different brokerages, the combined limit is still $72K for the year.

The $360,000 compensation cap is the other side of the same coin. The SEP formula cannot consider any income above $360,000 as the base for the 25% calculation. So 25% of $360,000 is $90,000, which is more than $72,000, which means the $72K cap kicks in first for high earners. The compensation cap matters more for SEP plans with multiple employees, where you need to track the cap per employee, not just for the owner. If you have a single highly-paid employee earning $500K, their SEP contribution is computed off $360K (capped), not their actual $500K wages.

For sole proprietors, the $72,000 cap first bites once net SE earnings reach about $360,000 (the SEP contribution works out to roughly 20% of net SE earnings, and 20% of $360,000 = $72,000). Above that level, additional profit does not raise the SEP contribution. Below that level, your SEP contribution is dollar-for-dollar tied to your earnings. Above it, you are stuck at $72,000 no matter how much more you make. A SEP IRA calculator should display both numbers so you know which side of the cap you are on and can plan accordingly. Hitting the cap is also a useful trigger to look at adding a defined benefit plan on top, which lets some high earners push total retirement contributions well past $200K per year.

Here is something the calculators rarely tell you. The $72,000 SEP cap is the same dollar figure as the solo 401(k) total contribution cap for 2026. They are not stacked. You cannot fund both at $72K. So if you already have a solo 401(k) maxed at $72K (employee deferral plus employer profit-sharing), you cannot also add a SEP IRA on top — the combined limit is $72K across both plans because the IRS aggregates them as one defined contribution limit. This trips up people who maintain a SEP for legacy reasons and start a solo 401(k) for the employee deferral feature, and the fix is to terminate the SEP before funding the 401(k) employer side.

Where the solo 401(k) beats the SEP in 2026 is the catch-up provision. SEPs do not have a catch-up contribution for participants age 50+. Solo 401(k)s do — $8,000 for ages 50-59 and 64+, and the $11,250 enhanced catch-up for ages 60-63 under SECURE Act 2.0. So a 62-year-old with a solo 401(k) can put in $83,250 in 2026, while the same person with only a SEP IRA caps out at $72,000. That $11K gap shows up clearly in any SEP IRA calculator that lets you toggle between SEP and solo 401(k) views. For people staring at retirement in five years, that gap compounds fast.

The compensation cap can also surprise you mid-year. If you are a high-earning consultant who fronts a big contribution in Q1 expecting strong full-year income, then revenue drops, you might end up over-contributed. A SEP IRA calculator run quarterly with updated income projections is the simplest fix. We do this for our real estate agent clients on commission-based income because their yearly totals swing a lot, and we have seen agents who funded $40K in Q2 end up with only $25K of eligible contribution by December.

If you do overshoot, the cleanup is on Form 5329 and the broker. You have until your tax filing deadline (including extensions) to remove the excess plus any earnings on the excess. After that, the 6% excise tax kicks in annually until you pull it out. Most brokers can process a return of excess contribution if you ask early, but they get cranky if you wait until October. A SEP IRA calculator that flags potential overshoot during the year is better than one that only computes the final number.

One last quirk on the $72K cap. Defined-benefit plans live outside the $72K defined-contribution limit, so a high-earning self-employed person can layer a DB plan on top of a SEP or solo 401(k) and push total deductible retirement contributions well into six figures. The DB side requires an actuary and a real plan, which costs $1,500-$3,000 per year to administer, but for a 55-year-old consultant earning $400K it can move $150K+ off the tax return annually. A SEP IRA calculator will not show you the DB layer, but if you are pegging the SEP cap year after year, the DB conversation is the next one to have. Reach out through our new client inquiry form if you want us to model it.

For 2026 specifically, double-check whatever SEP IRA calculator you are using shows the $72K cap and the $360K compensation cap. The IRS updates these in the fall of the prior year through a Notice document. Confirmation lives at irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps, and the formal SEP plan adoption document is on Form 5305-SEP at irs.gov/forms-pubs/about-form-5305-sep. If the calculator does not cite a year or limit, find a different one.

Yes, but the math is entirely different from the sole prop version, and a SEP IRA calculator that does not ask whether you are an S-corp or a sole prop is going to mislead you. For S-corp owners, the SEP contribution is computed off W-2 wages, not Schedule C profit, and the rate is a flat 25% rather than the effective 18.587% the sole prop side uses. The calculator should branch on entity type before it asks for any dollar inputs.

The base is W-2 box 1 wages from the S-corp. If you pay yourself a $100,000 salary, the maximum SEP IRA contribution is 25% of that, or $25,000 (subject to the $72K cap). No SE tax deduction to subtract first, no circular formula, no half-this-half-that. Just 25% of compensation. The S-corp pays the contribution and deducts it as a business expense on Form 1120-S, line 17 (employee benefit programs). The employee (you) gets the contribution credited to their SEP IRA account but does not show it on their personal 1040 because the deduction lives at the entity level.

This is the cleanest argument for the S-corp election, and a lot of people miss it. A sole proprietor with $200,000 of Schedule C profit gets a SEP contribution of about $37,000 (20% of net SE earnings). An S-corp owner with $200,000 of total profit who pays themselves a $150,000 W-2 salary and takes $50,000 as a distribution gets a SEP contribution of $37,500 (25% of W-2). Roughly the same number on this example, but the comparison shifts in favor of the S-corp owner as profit climbs — because the 25% rate on W-2 outruns the 18.587% rate on Schedule C. It also stacks with the SE tax savings the S-corp election provides on the distribution portion.

The surprising twist: setting your S-corp salary too low actively shrinks your SEP contribution. Most S-corp tax planning emphasizes minimizing W-2 wages to dodge payroll tax. That works for SE tax savings, but it caps your SEP ceiling at a fraction of what you could otherwise do. A $50,000 W-2 supports only a $12,500 SEP. A $200,000 W-2 supports a $50,000 SEP. So the optimal W-2 is not always the minimum — it depends on how much you want to put into the SEP IRA versus how much SE tax you are willing to pay. The right number sits at the intersection of reasonable comp rules, payroll tax savings, and your target retirement contribution.

The reasonable comp side matters too. The IRS expects an S-corp owner-employee to draw a salary that reflects fair market value for the work they do, not a token $10K. There are court cases (Watson, Davis, several others) where the IRS reclassified large distributions as wages because the owner’s salary was unreasonably low. Setting W-2 high enough to support your SEP target is a happy collision with that rule, but you cannot pick a number from thin air. Document the comp study, keep it on file, and revisit annually as your role changes.

For S-corp owners, the SEP IRA calculator should ask three things: W-2 box 1 wages, current age (to flag whether catch-up contributions matter under a solo 401(k) comparison), and the plan year. It should not ask for Schedule C profit, distributions, or 1120-S net income. None of those feed the calculation. If the calculator demands Schedule C profit when you have selected S-corp, the tool is confused and the output will be too. Run a different one.

One trap. The S-corp itself adopts the SEP plan on Form 5305-SEP, and the contribution has to be the same percentage for all eligible employees. So if you have W-2 employees beyond the owner, you cannot just fund the owner’s account. A SEP plan that contributes 25% of compensation to the owner has to contribute 25% to every eligible employee too. That ratchets the cost up fast, which is why most S-corp owners with employees switch from a SEP to a solo 401(k) (single-participant) before they hire, or to a safe harbor 401(k) once they have a real team. The crossover point is usually 2-3 employees.

A SEP IRA calculator that recognizes the S-corp case usually pulls the deduction onto the right line: Form 1120-S, line 17, employee benefit programs, with the offsetting expense reducing pass-through income on the K-1. It does not flow to the owner’s 1040 the way a sole prop SEP does (Schedule 1, line 16). If your calculator pushes the S-corp SEP onto your personal return as an above-the-line deduction, the calculator is wrong. Our services page covers the S-corp side of retirement planning, and the SEP-versus-solo-401(k) choice is one of the first questions we walk through with new business owner clients coming in through our new client inquiry form.

One more S-corp wrinkle the calculator should warn about. The SEP contribution must be funded by the S-corp’s tax filing deadline (including extensions), which for calendar-year S-corps is September 15. That is a month earlier than the sole-prop SEP deadline of October 15. So if you are running an S-corp and procrastinated, you have less time than the sole-prop side gets. We see S-corp clients miss the September deadline and lose the deduction for the year, which is a $5K-$15K mistake depending on the contribution size. A SEP IRA calculator that does not show entity-specific deadlines is leaving money on the table.

Last thought on the W-2 side. If you are setting the S-corp salary for the year, run the SEP IRA calculator before you finalize the salary number, not after. The salary has to support both reasonable compensation and your target SEP contribution. Going back later to bump the W-2 because the SEP ceiling came in too low triggers payroll re-runs and amended W-2s, and that gets expensive in a hurry. See the IRS overview at irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps for the salary-and-SEP interaction.

Use the SEP IRA calculator as your floor and the solo 401(k) calculator as your ceiling. For most self-employed people earning over $150K, the solo 401(k) puts more money into the retirement bucket. For people earning under $50K, the solo 401(k) gap is even bigger because the SEP IRA gives you only the employer-side percentage while the solo 401(k) adds an employee deferral that is essentially free contribution room.

The mechanical difference. A SEP IRA gives you 20% of net SE earnings (sole prop) or 25% of W-2 (S-corp), capped at $72,000 for 2026. A solo 401(k) gives you the same employer-side contribution at the same 20% or 25%, plus an employee deferral of up to $24,500 in 2026 (or $32,500 if you are age 50-59, or $35,750 if you are 60-63 under the SECURE 2.0 enhanced catch-up). The employee deferral is the lever the SEP IRA does not have, and it is what makes the solo 401(k) dominant at most income levels.

At low income, the employee deferral matters more. A sole prop with $40,000 of net profit gets a SEP IRA contribution of about $7,438 (20% of net SE earnings). The same person with a solo 401(k) can defer up to $24,500 as employee deferral (or up to 100% of compensation, whichever is less), plus the employer-side $7,438, for total contributions of about $31,938. That is a 4x difference at the same income, and the SEP IRA calculator should display it side-by-side when you toggle the comparison view. The employee-deferral portion at low income is often the difference between “saving for retirement” and “funding a real retirement.”

At very high income, the gap narrows. A sole prop with $400,000 of Schedule C profit hits the $72K cap on the SEP IRA side and the $72K cap on the solo 401(k) side (the employee deferral plus profit-sharing combine to the same $72K limit). The exception is the catch-up contribution. Solo 401(k)s allow it; SEP IRAs do not. So a 62-year-old self-employed at any income level can put $83,250 into a solo 401(k) ($72K plus $11,250 enhanced catch-up) but only $72K into a SEP IRA. Bigger gap than people realize when they are running scenarios.

Where the SEP IRA wins. Setup. A SEP IRA opens with Form 5305-SEP (or the prototype version your broker provides), no separate plan document, no annual filing, no Form 5500. A solo 401(k) requires a real plan document, annual plan administration, and a Form 5500-EZ filing once plan assets cross $250,000. So the SEP wins on simplicity even when it loses on contribution ceiling. We see plenty of single-owner consultants with $80K-$120K of net profit stick with a SEP IRA because the marginal $5K-$10K contribution increase under a solo 401(k) is not worth the annual admin and the 5500-EZ paperwork.

The Roth question. Solo 401(k)s can hold Roth contributions for the employee deferral portion, and under SECURE 2.0 the employer-side profit-sharing can now be designated Roth too if the plan document supports it. SEP IRAs technically allow Roth contributions starting in 2024+, but very few SEP providers actually support it as of 2026. So if you want the after-tax growth feature, the solo 401(k) wins on flexibility in practice. A SEP IRA calculator that does not show the Roth versus pre-tax split for the solo 401(k) comparison is missing the most important planning lever. Compare side-by-side on the calculators hub if your tool does not handle both.

The surprising line: the SEP IRA versus solo 401(k) choice is usually decided by employee deferral, not by employer profit-sharing percentage. Both plans use the same percentage on the employer side. What changes is whether you can also defer wages personally on top. The SEP says no, the solo 401(k) says yes. So when you run a SEP IRA calculator against a solo 401(k) calculator, focus on the employee-deferral line item. That is where the dollar difference comes from, and that is usually the entire reason a self-employed person switches from SEP to solo 401(k) once they understand both.

Deadline difference too. A SEP IRA can be set up and funded all the way through your tax filing deadline including extensions (so up to October 15 for the prior year). A solo 401(k) employee deferral has to be elected by December 31 of the year you want to contribute for, though the employer profit-sharing side can still be funded by the tax deadline. So if you are reading this in February and want a 2025 contribution, the SEP IRA is still on the table. The solo 401(k) for 2025 already closed the deferral window at the end of December.

One more consideration most calculators ignore. The SEP IRA counts as an IRA for backdoor Roth purposes, which means any pre-tax balance in the SEP fouls up the pro-rata calculation on a backdoor Roth conversion. A solo 401(k) does not. So if backdoor Roth is part of your strategy, the solo 401(k) is the friendlier vehicle. If you do not care about backdoor Roth, the SEP is simpler. This is an easy thing to miss until you try the backdoor for the first time and the pro-rata math wipes out the conversion benefit. We catch this in tax strategy consulting reviews with high-income clients moving between the two plan types.

One final scenario worth running. If you have a SEP IRA today and are considering switching to a solo 401(k) for the catch-up and Roth features, you have to terminate the SEP and roll the balance into the solo 401(k) (or leave it in a separate SEP that you stop contributing to). You cannot run both with active contributions in the same year. A SEP IRA calculator that supports the comparison view should walk you through the transition mechanics, not just the final-year contribution number. The rollover itself is non-taxable if done as a direct trustee-to-trustee transfer, and it can be timed to keep the backdoor Roth math clean for future years.

For a full walk-through, see the IRS comparison at irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps, our tax strategy guides on self-employed retirement planning, or reach out through our new client inquiry form. The plan-document choice is one of the highest-impact decisions a self-employed person makes, and a SEP IRA calculator alone will not capture all of it.