What is a partner＊s ※compensation§ for retirement plan purposes?
A partnership makes annual contributions to a partner＊s retirement plan account based on the partner＊s net earned income.
Net earned income
For a partner, this is calculated in the same way as for most other self-employed plan participants by starting with the partner＊s earned income and then subtracting:
- plan contributions for the partner, and
- half of the partner's self-employment tax.
Publication 560 has tables and worksheets to calculate the deduction for contributions to a qualified plan for a partner.
Partner＊s earned income
A partner＊s earned income is the income received for his or her services to materially help produce that income (see IRC and
Not every partner may have earned income (for example, a limited partner who does not provide services to the partnership and is merely an investor). Also, all of a partner＊s income from the partnership may not be earned income (for example, investment income that is passed through the partnership to the partners).