3828 / How is the amount of a self-employed individual’s contribution to a Keogh plan calculated?

The calculation of the contribution for the self-employed individual involves two unique calculations that do not apply to common law employees: the calculation of the deduction for self-employment taxes, and the contribution calculation.

The individual’s earned income from a business is used to calculate the self-employment taxes that are due on the earned income. These taxes are similar to FICA taxes. A self-employed individual may deduct one-half of his or her self-employment taxes¹ in computing adjusted gross income but not in computing the earned income subject to self-employment tax.

This reduces the amount of earned income available to calculate the self-employed individual’s own contribution. The net amount is referred to as net earnings from self-employment.

Contributions on behalf of a self-employed individual are based on his or her “net earnings from self-employment reduced by the contribution itself. That is, the earned income that is used to determine the individual’s contributions is reduced by the contribution made to the plan on the individual’s own behalf. Thus, for example, a common law employee would need only $276,000 of compensation to support a deductible contribution of $69,000 to a defined contribution plan in 2024 ($276,000 × 25% = $69,000) ( Q 3750). A self-employed individual would need net earnings from self-employment of $245,000 ($276,000 plus $69,000) or more in 2024 to receive a contribution of the same amount.² This produces an effective maximum contribution percentage of 20 percent for self-employed individuals.

Matching contributions that are in effect made by the partner, other than QMACs ( Q 3860), are not treated as elective deferrals for purposes of the limit on such deferrals under IRC Section 402(g) ( Q 3760, Q 3802).³ Rather, they are treated as employer contributions for all plan purposes.