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, Partnerships PDF Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
