Net earned income
For a partner net earned income is calculated in the same way as for most other self-employed Self-Directed Solo 401k plan participants by starting with the partner's earned income and then subtracting:
- plan contributions for the partner, and
- half of her seal-employed tax.
IRS Publication 560 has tables and worksheets to calculate the deduction for contributions to a qualified plan for a partner.
Partner's earned income
A partner's earned income is the income he or she receives for his or her services to materially help produce that income (see Code 1402 and 401(c)(2).) A partner must separately calculate her or his earned income for each trade or business.
Not every partner may have earned income (for example, a limited partner who does not provide services to the partnership and is merely an investor). Also, all of a partner's income from the partnership may not be earned income (for example, investment income that is passed through the partnership to the partners). As a result, contributions may not be made to Solo 401k if net income is not generated.
Reporting a partner's earned income
Each partner's earned income or loss is listed on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. The partnership must give a Schedule K-1 to each partner by the filing due date (including extensions) of the partnership's Form 1065, U.S. Return of Partnership Income (instructions).
Publication 541, Partnerships
Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)