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Type of business entity determines what can be counted as compensation in calculating the contribution amounts for a defined benefit plan.
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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 |
Schedule C (net profit) |
Earned Income (calculate) * |
Partnership |
Schedule K-1 (net profit) |
Earned Income (calculate) * |
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 minus 1/2 self employment tax minus plan contribution. Deductions for sole proprietors and partners are limited to net profit minus 1/2 self-employment tax.
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