How to Report Partner Retirement Plan Contributions on Tax Forms

Partners in a business can contribute to retirement plans, but reporting these contributions correctly on tax forms is essential to avoid errors and potential penalties. Since partners are not considered employees for tax purposes, their contributions follow different rules than those of regular W-2 workers.

Properly handling these contributions ensures compliance with IRS regulations and maximizes tax benefits.

Determining Eligibility

Before reporting partner retirement contributions, it’s necessary to confirm eligibility. This depends on the partnership agreement, IRS regulations, and the structure of the retirement plan. Since partners are considered self-employed, their contributions follow different rules than those for employees.

A partnership agreement typically outlines whether partners can participate in a retirement plan and how contributions are determined. Some agreements specify contribution percentages based on net earnings, while others impose restrictions. If the agreement does not address retirement contributions, it may need to be amended to comply with IRS guidelines.

The IRS requires that contributions be based on a partner’s net earnings from self-employment, calculated after deducting business expenses and the deductible portion of self-employment taxes. A partner’s reported income on Schedule K-1 (Form 1065) directly impacts contribution limits. If a partner has multiple sources of self-employment income, they must aggregate earnings to determine total allowable contributions.

Types of Partner Retirement Contributions

Partners can contribute to several types of retirement plans, each with distinct tax treatment and reporting requirements. The most common plans include 401(k) plans, SEP IRAs, and SIMPLE IRAs, each with different contribution limits and administrative requirements.

401(k)

A partner can participate in a 401(k) plan if the partnership has established one. Unlike employees who contribute through payroll deductions, partners contribute based on net earnings from self-employment. Contributions can be made as elective deferrals, which reduce taxable income, or as employer nonelective contributions, funded by the partnership.

For 2024, the elective deferral limit is $23,000, with an additional $7,500 allowed for those aged 50 or older. Employer contributions, including profit-sharing, are capped at 25% of net earnings, up to a total of $69,000 (or $76,500 with catch-up contributions). These contributions are reported on the partner’s Schedule K-1 (Form 1065) and deducted on the partnership’s tax return. If plan assets exceed $250,000, the partnership must also file Form 5500.

SEP IRA

A Simplified Employee Pension (SEP) IRA allows partnerships to contribute on behalf of partners. Unlike a 401(k), SEP IRAs do not permit elective deferrals; contributions are made solely by the partnership. The maximum contribution for 2024 is the lesser of 25% of a partner’s net earnings from self-employment or $69,000.

To calculate the allowable contribution, net earnings must be reduced by the deductible portion of self-employment taxes. For example, if a partner’s net earnings are $100,000, the self-employment tax deduction is approximately $7,065, leaving $92,935 as the base for the 25% contribution limit. This results in a maximum contribution of $23,233. SEP IRA contributions are reported on Schedule K-1 (Form 1065) and deducted on the partnership’s tax return. Unlike 401(k) plans, SEP IRAs have minimal administrative requirements and do not require annual filings like Form 5500.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is an option for partnerships with 100 or fewer employees. Partners can make salary deferral contributions, and the partnership must provide either a matching contribution of up to 3% of net earnings or a fixed 2% contribution for all eligible participants.

For 2024, the salary deferral limit is $16,000, with an additional $3,500 catch-up contribution for those aged 50 or older. If a partner earns $80,000 in net self-employment income and elects to defer 10% ($8,000), the partnership can match up to 3% ($2,400), bringing the total contribution to $10,400. SIMPLE IRA contributions are reported on Schedule K-1 (Form 1065) and deducted on the partnership’s tax return. SIMPLE IRAs require Form 5305-SIMPLE or Form 5304-SIMPLE to establish the plan but do not require annual filings like Form 5500.

Calculating Contribution Limits

Determining how much a partner can contribute requires careful consideration of IRS rules and compensation calculations. Since partners do not receive W-2 wages, their contributions are based on net earnings from self-employment, which must be adjusted before applying contribution limits.

One key factor affecting contribution limits is the self-employment tax deduction. The IRS allows partners to deduct half of their self-employment tax when determining their contribution base. For example, if a partner earns $120,000 in net income from the partnership, self-employment taxes amount to approximately $18,360. After deducting half ($9,180), the adjusted net earnings used for retirement contributions would be $110,820.

Plan rules also impose restrictions. Some plans cap the amount of income that can be considered for retirement contributions. For 2024, the IRS compensation cap for defined contribution plans is $345,000, meaning earnings above this threshold do not increase contribution limits. Additionally, some partnership agreements may restrict contributions to a fixed percentage of earnings.

Reporting on Tax Forms

Properly documenting partner retirement contributions ensures compliance with IRS regulations and prevents discrepancies that could trigger audits or penalties. Since partners are not treated as employees, their contributions are not reported on a W-2 but instead flow through the partnership’s tax return and the individual partner’s filings. The primary document used for this reporting is Schedule K-1 (Form 1065), which allocates each partner’s share of income, deductions, and contributions.

When preparing Form 1065, the partnership deducts allowable retirement contributions as an expense on the business return, reducing taxable income at the entity level. The deducted amount is then passed through to partners via their K-1s, typically listed under box 13 with code R for SEP, SIMPLE, or qualified plans. Partners must report these contributions on their personal tax returns, usually on Schedule 1 (Form 1040), where they can claim the deduction against self-employment income. Failing to align partnership deductions with reported individual contributions can create inconsistencies that may attract IRS scrutiny.

Catch-Up Contributions

For partners aged 50 and older, catch-up contributions provide an opportunity to increase savings beyond standard limits.

In a 401(k) plan, the catch-up limit for 2024 is $7,500, allowing a total elective deferral of $30,500. This additional amount does not count toward the standard contribution cap, meaning a partner can contribute the full $23,000 plus the catch-up if eligible. SIMPLE IRAs also permit catch-up contributions, with an extra $3,500 allowed on top of the $16,000 standard limit. SEP IRAs, however, do not offer catch-up contributions, as they are funded solely through employer contributions. Partners taking advantage of catch-up contributions must ensure they properly report these amounts on their tax filings, as exceeding allowable limits can result in penalties and required corrections.

Maintaining Documentation

Accurate recordkeeping is necessary for compliance with IRS regulations and substantiating retirement contributions in the event of an audit. Since partners’ contributions are based on net earnings rather than fixed salaries, maintaining detailed financial records is essential to verify calculations and deductions. Partnerships should retain copies of tax returns, Schedule K-1 forms, and supporting documentation such as plan statements and contribution confirmations.

Beyond tax filings, partners should keep records of partnership agreements that specify retirement plan participation and contribution terms. If a partner’s contributions are ever questioned by the IRS, having a clear paper trail demonstrating how amounts were determined and reported can prevent disputes. Partnerships sponsoring retirement plans must also comply with plan document retention requirements, ensuring that plan amendments, IRS determination letters, and annual filings like Form 5500 (if applicable) are readily available.