What is a partner’s “compensation” for retirement plan purposes?
A partnership makes annual contributions to a partner’s retirement plan account based on her net earned income.
Net earned income
For a partner, this is calculated in the same way as for most other self-employed plan participants (PDF) by starting with the partner’s earned income and then subtracting:
- plan contributions for the partner, and
- half of her 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 she receives for her services to materially help produce that income (see Internal Revenue Code section 1402 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).