Calculation for self-employed pension plan

From Ray Kump, CPA

CompuServe ID: [71773,1274]

The calculation for the allowed deduction (and contribution) for self employed pensions is based upon self employed income after taking into account the deduction for the pension plan. A $100,000 net profit less the pension deduction of 25% would yield a $20,000 pension contribution. $100,000 (net profit) less $20,000 (pension deduction) is $80,000. $80,000 (net after taking into account the pension deduction) times 25% (the actual percentage) results in a $20,000 allowed deduction and contribution. This Solver equation calculates the effective rate based upon the actual rate. It is much easier to calculate the contribution using the effective rate times the net profit. Enter 25% for the actual rate and it will tell you that 20% will provide the effective rate.

{Pens_Plan_selfem|

Eff_Rate=Actual_Rate

/(100+Actual_Rate)*100}

Actual_Rate is the actual rate you are using per the pension plan documents. Eff_Rate is the rate you would use in making the actual contribution calculation directly on the schedule C net profit per the tax return.