How the self-employed retirement deduction works
Korea's small business mutual aid fund has no direct U.S. counterpart, but the same job is done by two self-employed retirement plans: the SEP-IRA and the Solo 401(k). Both let a sole proprietor or single-member LLC owner deduct contributions from taxable income while the money grows tax deferred, and both are far more generous than a plain IRA.
The math is not simply a percentage of profit. Under 26 U.S.C. 1402 your net earnings from self-employment are 92.35% of net profit, self-employment tax is charged on that, and half of it is deductible. Subtracting that half gives adjusted net earnings, and the employer-style contribution is 25% of post-contribution compensation, which works out to 20% of the adjusted figure. A Solo 401(k) adds an elective deferral on top, and the total is capped by the 415(c) annual additions limit.
Figures are on a 2026 basis. The deferral limit and the annual additions limit are indexed each year and announced by the IRS, so both are editable fields here. This calculator also leaves out the Social Security wage base cap, the additional Medicare tax, catch-up contributions for people age 50 and over, and the effect of employees you may have to cover. It is an estimate for planning, not a tax return figure, so confirm the current limits in IRS Publication 560 and check your own case with a tax professional.
Frequently asked questions
A SEP contribution is 25% of compensation, but a sole proprietor's compensation is itself reduced by the contribution. Solving that circular definition turns 25% of post-contribution earnings into roughly 20% of net earnings after the deductible half of self-employment tax.
No. Contributions to a SEP-IRA or a Solo 401(k) reduce taxable income for income tax purposes, but self-employment tax under 26 U.S.C. 1401 is figured on net earnings before the retirement plan deduction.
At lower income a Solo 401(k) usually wins because the elective deferral does not depend on profit, while at higher income both converge on the same annual additions limit. Solo 401(k) plans carry more paperwork, including Form 5500-EZ once assets pass a threshold.