"Compensation" for Sole Proprietor

[Lynn Campbell]

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.)

[mbozek]

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.

[Appleby]

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...

[Lynn Campbell]

I am still wondering: what is the compensation for purposes of the 3% non-elective contribution? Thank you.

[rcline46]

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).