The employee's wages you report in box 1 of Form W-2. Compensation generally cannot include either of the following items. A contribution is an amount you pay into a plan for all those participating in the plan, including self-employed individuals. Limits apply to how much, under the contribution formula of the plan, can be contributed each year for a participant. A deduction is the plan contributions you can subtract from gross income on your federal income tax return.
Limits apply to the amount deductible.
Earned income is net earnings from self-employment, discussed later, from a business in which your services materially helped to produce the income. You can also have earned income from property your personal efforts helped create, such as royalties from your books or inventions. Earned income includes net earnings from selling or otherwise disposing of the property, but it does not include capital gains. It includes income from licensing the use of property other than goodwill. If you have more than one business, but only one has a retirement plan, only the earned income from that business is considered for that plan.