Self-Employment Income Calculation Self-Employment Income Calculation

Self-Employment Income Calculation

Melissa Howard Melissa Howard

Owners of any entity that is taxed as a partnership or sole proprietorship are coded as 'Self Employed' in the Employee Class column on the census grid; this triggers the software to calculate the earned income, which is their compensation for plan allocation purposes. The starting point for calculating earned income is gross compensation from either Schedule K-1 (for a partner) or Schedule C (for a sole proprietor). This compensation (less any depreciation allowance under IRC §179 if applicable) is what you will enter into the census grid in the ftwilliam.com software.

When you run the allocation, the system deducts any employer contributions for common law employees in proportion to the ownership percentage entered in the census, and reduces the compensation for the IRC 164(f) deduction. Additionally, the software runs circular calculations to determine the allocation amount (if applicable) and reduces the self-employed person’s compensation by that amount as well. The resulting number is the earned income.

To view the reductions to the earned income, go to Other Import/Export/Reports and select the 'ftw Self Employment Calculations' from one of the drop down boxes and click 'Save Selections'. Then click the Edit Data link to view the data.

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Comments

6 comments

  • Craig Franke

    Please be careful of Roth contributions as currently Ft Williams reduces qualified compensation by Roth deferrals but does not for pre tax deferrals.

    Craig Franke
    0
  • Julie O'Connor

    Should pre tax be deducted?

    Julie O'Connor
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  • Melissa Howard

    Great question! No, pre-tax elective deferrals under a 401(k) arrangement do not reduce qualified compensation for purposes of calculating earned income for self-employed persons.

    Our position on Roth and After-tax contributions is a conservative one given the lack of clear guidance. Should anyone have clear guidance regarding how Roth and After-tax contributions are treated when calculating earned income, please do share this with us by sending to support@ftwilliam.com.

    TAX / LEGAL DISCLAIMER: Wolters Kluwer Law and Business dba ftwilliam.com does not provide legal or tax advice and material contained herein should not be construed as such. All opinions are that of the individual and may not reflect the actual opinion of Wolters Kluwer Law & Business.

    Melissa Howard
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  • Craig Franke

    I think IRS Publication 560 does a good job of explaining how this calculation works.  There is a worksheet within this Publication that walks through how Self-Employed Income is calculated.  "Deduction Worksheet for Self-Employed"

    Craig Franke
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  • Julie O'Connor

    Craig,

    I agree that Publication 560 is helpful to use and often do so.  It always comes up $1 higher than ftWilliam's calculation.  I presume that it is due to rounding, so I use ftWilliam's number.  I wondered if you or any one else have noticed a difference when running the calculation manually.

    Julie

    Julie O'Connor
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  • Craig Franke

    Julie,

    That is pretty common in my experience.  I also run the calculation manually, and am usually off small amounts here or there, that I attribute to rounding.  This is especially the case if you have more than one owner, and are splitting the employer contribution deduction.

    Craig Franke
    0