Calculating Traditional IRA contribution amount for self-employed question

  • If my self-employed profit is $3,000 (as an example) and I pay $100 (as an example) for “one-half of self-employment tax” – then what would be my maximum allowed contribution amount to a Traditional (Ordinary) IRA (not SEP or SIMPLE, etc.). Would it be $3,000 or $2,900 ($3,000-$100)?

  • If your self-employed net earnings = $3000, and no other contributions to retirement plans have been made on your behalf, then your maximum contribution – using your hypothetical numbers, @Richard – would be $2900 (income minus 1/2 of your SE Tax).

    Using real numbers, half of the self-employment tax would actually be:
    $3000 x 6.2% Social Security = $186.00
    $3000 x 1.45% Medicare = $43.50

    $3000 - $229.50 = $2770.50

    From the IRS:

    Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:

    • The deduction for contributions made on your behalf to retirement plans, and
    • The deduction allowed for the deductible part of your self-employment taxes.

    Compensation includes earnings from self-employment even if they aren’t subject to self-employment tax because of your religious beliefs.

    For 2017, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts:

    • $5,500 ($6,500 if you are age 50 or older).
    • Your taxable compensation (defined earlier) for the year.

  • @kohlspowrshopper Thanks, I will calculate the exact “one-half of self-employment tax” when I file. So for an ordinary IRA (I am not talking SEP or SIMPLE or other similar plans, such as Solo 401(k), Keogh, etc.) my max deduction is Net Profit - “one-half of self-employment tax”, and I think the rational for this could be that “one-half of self-employment tax” is already deducted once from Adjusted Gross Income (AGI) prior to IRA deduction?

    Also, another BIG confusion is between 2 terms Net Profit and Net Earnings (Line 6 of Section B—Long Schedule SE (Part I - Self-Employment Tax)). Net Earnings is obtained by multiplying Net Profits by 0.9235. So your calculation for $3,000 Net Profit should be amended as follows:
    $3,000 x 0.9235 = $2,770.50 (Net Earnings)
    $2,770.50 x 6.2% Social Security = $171.771
    $2,770.50 x 1.45% Medicare = $40.17225
    One-half of self-employment tax = $211.94
    So my max IRA deduction is NET PROFIT - “One-half of self-employment tax” and not NET EARNINGS - “One-half of self-employment tax”. I this a correct understand of the terms?

  • If you’re self employed, can’t you also put in like a billion dollars into the 401K?


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