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To do the calculation, you need the following (this assumes you have no employees who are in the plan):

A> Net Schedule C Income (Line 31 I believe) after expenses (but NOT your Keough expense - your contribution amount goes on the first page of your 1040, not expense under Schedule C)

B> From your 1040, amount of the Self Employment Tax Deduction (which is calculated from Schedule SE).

Subtract SET Deduction from Schedule C Income. This amount is what you have available between "Net Earned Income" and your Keogh contribution.

In your case, you stated you have a 25% of Pay Money Purchase Plan (subject to a maximum of $30,000 contribution in calendar year 2000).

Let's assume you have $100,000 after SET deduction. Therefore, your Keogh contribution would be $20,000 (25% of $80,000 Net Earned Income). Algebra is Net Earned Income = $100,000 divided by 1.25. As a check, apply contribution formula to NEI; should add back to $100,000.

As an aside, back in 1983 when these rules first came out, I remember a bunch of folks complaining about the "inequity" between self-employed and salaried folks. The mistake was they were thinking that the self-employed person with $100,000 Schedule C could only get a $20,000 contribution while the salaried folk at $100,000 could get a $25,000 contribution. Of course, in the case of the self-employed, the $20,000 was coming out of their $100,000 while the salaried folk they were using in their argument was receiving $125,000 between salary and contribution. Fairer comparison is with the salaried person making $80,000 receiving a $20,000 contribution (neutral between sponsoring entities - which was the intent of TEFRA).

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