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 Section 1402 and Section 401(c)(2).) A partner must separately calculate earned income for each trade or business. 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). Additional Resources: Publication 541, PartnershipsPDF Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)