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Lynn Campbell

"Compensation" for Sole Proprietor

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If a sole proprietor has a safe harbor 401k plan, what is the "compensation" for the sole proprietor for the 3% non-elective contribution? Is it Schedule C reduced by 1/2 SE Tax and reduced by all the 401k contributions except the deferrals? I am confused! (Nothing new.)

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SEE IRC 404(a)(8) which refers to definition of earned income in IRC 401©(2). Under the recent tax law amendments, comp under 404(a) is not reduced for 401(k) deferrals. The max deferral is 20% of the net earnings from SE after reduction for 1/2 of the SECA tax.

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mbozek…am I missing something here? Isn’t the maximum deferral 100 percent of Modified Net Profit

- NTE the 402(g) limit?...

The 20% would apply to the 404(a)(3)(A) limit...

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The 3% compensation would be the same as before, except 401k contributions are NOT subtracted.

That is Net Schedule C less 1/2 fica less 404 contribs (max 20% of final number).

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