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February 20, 2009

Earned income

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Definition

Net income from self-employment with respect to a trade or business in which personal services of the taxpayer are a material income-producing factor.

For SEP IRAs and qualified plans, net earnings from self-employment is gross income from trade or business , where the self-employed individual’s personal services are a material income-producing factor, minus allowable business deductions. Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deduction allowed for one-half of the self-employed individual’s self-employment tax.

For SIMPLE plans, net earnings from self-employment is the amount on line 4 of Short Schedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for the self-employed individual.

Referring Cite

IRC § 401(c)(2) , IRC §1402(a)

Additional Helpful Information

  • Net earnings from self-employment do not include items excluded from gross income (or their related deductions) other than foreign earned income and foreign housing cost amounts.
  • Net earnings include a partner’s distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses).
  • Net earnings does not include income passed through to shareholders of S corporations.
  • Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership.
  • Distributions of other income or loss to limited partners are not net earnings from self-employment.
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