Why the rate is 20%, not 25%
Every IRS publication says 25%. But for self-employed people, the effective rate works out to 20%. Here's why.
Your SEP-IRA contribution is itself deducted from the income it's based on — a circular calculation. Solve the algebra and 25% on post-contribution income equals exactly 20% of pre-contribution income.
Full derivation here. The key takeaway: if you multiply your Schedule C profit by 25%, you'll overstate your max. Multiply by 20% (after adjustments) for the correct number.
What "net self-employment income" means
It's your profit after all business expenses. Schedule C Line 31.
If you have multiple sole proprietorships, add their Line 31 totals together.
If you're an S-Corp owner, use your W-2 wages × 25% instead — different calculation, simpler, capped at $70k for 2025.
The 2025 cap
$70,000. If the calculator above gives a number higher than that, your contribution caps at $70,000 regardless.
Catch-up contributions?
SEP-IRAs do not allow catch-up contributions. If you're 50+, a Solo 401k lets you add $7,500 more.
Deadline for 2025
You can open and fund a SEP-IRA for 2025 as late as your tax filing deadline, including extension. That's October 15, 2026 if you file an extension. This is one of the few tax moves you can still make for the prior year long after it's ended.
How to open one
- Pick a broker: E*TRADE, Fidelity, Schwab, or Vanguard
- Open account online — typically 10 minutes
- Fund it via ACH from your business checking
- Allocate to investments of your choice
- At tax time, enter the contribution on Schedule 1 Line 16
Don't leave money on the table.
We flag unused retirement contribution room on your return. A $10k missed SEP contribution is $2,400–$3,700 in refund you could have claimed.