·         I am aware of the fact that “Self-employed employer contributions are not compensation . . .”The Internal Revenue Code uses the wording:Section 401(c)(2)(A)(v) of the Internal Revenue Code (the Code), which provides that “The term “earned income” means the net earnings from self-employment (as defined in section 1402(a)), but such net earnings shall be determined—(v) with regard to the deductions allowed by section 404 to the taxpayer. . . .”  The plain English meaning of “determined with regard . . .” is not obvious.  It would be better conveyed by “determined as net earnings from self-employment reduced by the deductions allowed by section 404 to the taxpayer. . . .”  This method of determining “earned income” is the reason for the old Keogh (profit sharing) plan limitation of 13.043% for owner-employees and 15% for common law employees when the profit sharing plan limitation was 15%.  The 13.043% number was obtained by splitting the net earnings from self-employment, i.e. the net profit, into two numbers, such that one of them is 15% of the other one.  If the net profit for the owner of a business with employees is $100,000, then this amount must be split into compensation, “C,” and contribution, “c,” such that:C + c = $100,000 andc = .15CSubtract the second equation from the first:C = $100,000 – .15CAdd .15C to both sides of the equation.C + .15C = $100,000Combine like terms.1.15C = $100,000Solve for C.C = $86,956.52Solve for c.c = $100,000 – $86,956.52 = $13,043.48, which is the maximum contribution for the owner-employee.$13,043.48 is 15% of $86,956.52, but it is 13.043…% of $100,000.  $100,000, not $86,956.52 is the known quantity when this calculation is done.  The net profit of $100,000 has been reduced by the salaries of common law employees and the contributions to the Keogh plan for eligible employees.  The contributions for the eligible employees 15%, not 13.043…% of their salaries.  Not everyone, who runs a successful business is a Philadelphia lawyer with knowledge of algebra.  Undoubtedly, there were many testy encounters between gruff self-employed successful businessmen, who didn’t go to high school and a soft-spoken erudite accountant over “Why do I have to put 15 percent into the Keogh for the employees, but only 13 something percent for myself?  You never told me this.  The broker never told me this.”·         Step 6 reads “Multiply $280,000 by your plan contribution rate (not the reduced rate).”  The plan contribution rate for this example is 8.5%.  The reduced rate is equal to: (base contribution rate / (1.0 + base contribution rate) =.085/(1 + .085) = .078. The IRS-calculated number 21,840 is equal to .078 × 280,000, not .085 × 280,000, even though the instruction in Step 6 is to multiply 280,000 by the plan contribution rate, i.e. .085, not the reduced rate, i.e. .078.  This is why I think there is an error in the worksheet. ·         I am aware of the fact that the compensation limitations are $280,000 for 2019—this amount appears in the latest Publication 560, $285,000 for 2020 and $290,000 for 2021.My original post has a typo.  The last word in the second line should be “it,” not “is.” 

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