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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.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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Saver’s Credit

Definition Also known as the Saver’s Tax Credit: Nonrefundable tax credit available to eligible individuals who make contributions to their retirement account. The saver’s credit

SIMPLE 401(k) Plan

Definition A SIMPLE 401(k) plan is a 401(k) plan  established by a small business for it’s employees. Earnings accrue on a tax-deferred basis and distributions

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