A business’s entity type determines what can be considered compensation when calculating the contribution amounts available for both defined contribution and defined benefit plans.
|Compensation Quick Reference Chart|
|Entity Type||Source of Income||Compensation for Plan|
|Corporation||W-2 Income||W-2 Income|
|S-Corporation||W-2 + Schedule K-1||W-2 Income Only|
|Sole Proprietorship||Net Profit||Earned Income (Calculate) *
Schedule C, Line 31
|Partnership||Net Profit||Earned Income (Calculate) *
Schedule K-1, Line 14, Code A
Limited Liability Company (LLC) – Compensation for plan depends on how LLC is taxed. See above for partnership or corporation rules. Employees other than owners are paid W-2 income for all entity types.
* Earned income = net profit (Line 31 of the Schedule C as a Sole Proprietor or Line 14, Code A of the Schedule K-1 as a Partnership)minus one-half self-employment tax minus plan contribution. Deductions for sole proprietors or partnerships are limited to net profit minus one-half self-employment tax.
Please note, the plan document will also have a definition of compensation that may exclude certain types of compensation, such as severance and bonus pay.
Below is a link to the IRS website for more information and worksheets for self-employed individuals.
We recommend reaching out to your tax advisor or CPA to determine eligible compensation, as Stifel does not provide tax advice. You may also refer to IRS Publication 560 for further information.