SE Income Calculation

[Dawn Hafner]

Compensation to use for SE income: Issues the CPA is bringing up -

The document elects not to have 401(k) deferrals reduce compensation. We think 401(k) deferrals still reduce SE comp, but the CPA is thinking because of the document it does not.

What about IRC 179 depreciation? If we just pick up the SE number from Form K-1, does any adjustment need to be made for IRC 179 to get to the SE comp?

Thanks.

[jaemmons]

I would agree with you. "Earned income" is net earnings from self employment (which would included the depreciation expense if it is attributable to the trade or business)which is used in determining self employment taxes, reduced by contributions made on their behalf to the plan (including "salary" deferrals) and 1/2 the self employment tax. Most, if not all, plan document definitions of compensation refer to earned income for self employed individuals, as defined in IRC 401©(2). Since deferrals are not a deductible expense to the trade or business, but an individual adjustment to gross income on their respective 1040, they are not included in the determination of "earned income" for plan purposes.

If the depreciation expense is used in determining the owner-employee's SE tax, then no adjustment would be necessary since it has already been taken into account for determining net earnings from self-employment.

[Moe Howard]

The self-employed person's deferrals & contributions (to his own participant account) ... are never allowed to be deducted in arriving at his SE income. However, deferrals & contributions made to the participant accounts of his employees will be deducted in arriving at his SE income.