How is the self-employed retirement deduction figured?

Why the self-employed need a special computation

For an employee, a 10% employer contribution is simply 10% of pay. For a sole proprietor or partner it is not, and the reason is circular. Your “pay” for plan purposes is your net earnings from self-employment, and Publication 560 says that figure is reduced by both the deduction for the deductible part of your self-employment tax and the deduction for the contribution you make to your own plan. But the contribution depends on the earnings, and the earnings depend on the contribution. The publication breaks the loop by having you shrink the rate instead of the earnings.

Net earnings from self-employment, for SEP and qualified plans, are your gross income from your trade or business (where your personal services are a material income-producing factor) minus allowable business deductions, including contributions to plans for common-law employees and the deduction for the deductible part of self-employment tax. They do not include income passed through to S corporation shareholders. A partner’s net earnings include the distributive share of partnership income or loss.

Step 1: the reduced rate

The Rate Table for Self-Employed in chapter 5 turns your plan’s contribution rate into a reduced rate. If your plan’s rate is not a whole percentage, the Rate Worksheet does the same arithmetic: take the plan rate as a decimal, add 1, and divide the first by the second. For a 10.5% plan, 0.105 ÷ 1.105 = 0.095. The publication’s own example: a sole proprietor with no employees and a 10% plan rate uses 0.090909. A 25% plan rate becomes 0.20. Note that the table and worksheets apply only to self-employed people with a single defined contribution plan, such as a profit-sharing plan; a SEP is treated as a profit-sharing plan, but you should not use these worksheets for SARSEPs.

Step 2: the Deduction Worksheet

Without elective deferrals, the worksheet reduces to a few lines. Step 1 is net profit (Schedule C line 31, Schedule F line 34, or Schedule K-1 box 14 code A). Step 2 is your deduction for self-employment tax from Schedule 1 line 15. Step 3 is net earnings: step 1 minus step 2. Step 4 is the reduced rate. Step 5 is step 3 times step 4. Step 6 is $350,000 times your plan contribution rate (the unreduced rate). Step 7 is the smaller of 5 and 6, and step 8 is the $70,000 contribution dollar limit. With no elective deferrals, your maximum deductible contribution is the smaller of step 7 and step 8. If you did make elective deferrals, as in a solo 401(k), the worksheet continues through step 21, which this page does not model; our solo 401(k) and SEP calculator covers that case.

Worked example

A sole proprietor has a net profit of $80,000 and an SE tax deduction of $5,652 (an illustrative figure; take yours from Schedule 1). Her SEP contribution rate is 10%. Step 3 is $80,000 − $5,652 = $74,348. Step 4 is 0.090909. Step 5 is $74,348 × 0.090909 = $6,758.91. Step 6 is $350,000 × 10% = $35,000. Step 7 is the smaller of the two, $6,758.91, and that is below the $70,000 dollar limit, so her maximum deductible contribution is about $6,759.

Notice what happened. A straight 10% of $80,000 would be $8,000, and a straight 10% of her $74,348 net earnings would be $7,435. The reduced-rate method gives $6,759, which equals 10% of what her earnings come to after subtracting the contribution itself ($74,348 − $6,759 = $67,589, and 10% of that is $6,759). That is the loop the worksheet closes.

Where the deduction goes, and the limits that sit above it

You enter your actual contribution, not more than the maximum, on line 16 of Schedule 1 (Form 1040). Sole proprietors and partners cannot deduct contributions for themselves as a business expense; only contributions for common-law employees are business expenses. For a partner, contributions for yourself are shown on the Schedule K-1 you receive. The general 25% employer deduction limit and the carryover and excise tax rules are on our employer contribution deduction page. If you have a net loss from self-employment you cannot contribute for yourself that year. You can lower the SE tax deduction input by using our self-employment tax calculator to find that number.

Sources

• IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans) (2025): Chapter 1 (Net earnings from self-employment; Earned income), Chapter 2 and Chapter 4 (Deduction Limit for Self-Employed Individuals), Chapter 5 (Rate Table for Self-Employed; Rate Worksheet; Deduction Worksheet for Self-Employed). Read November 2, 2026.

Edition read: Publication 560 (2025), for use in preparing 2025 returns. Where the publication gives 2026 figures, this page labels them 2026. Dollar limits change every year; check the current publication and form instructions for your plan year. This page summarizes the publication and does not replace it.