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Phil glossed over the math. If you read the Internal Revenue Code, you will find that SEP deductions are indeed limited 25% of your net self-employment income. But your net self employment income is not the bottom line of your schedule C. You start with that, then subtract off the deduction for 1/2 of your Self Employment tax, AND you also subtract off the deduction for your SEP contribution.

That's a bit of a circular calculation. But if you dust off your high school algebra, you'll find that 25% of your SE income after deducting the SEP contribution is the same as 20% of your SE income before deducting the SEP contribution.

Hence, the usual short cut of saying your SEP is limited to 20% of your SE income.

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