The contribution is limited by income.
What Is Compensation?
Generally, compensation is what you
earn from working. For a summary of what compensation does and does not
include, see Table 1-1. Compensation includes all of the items discussed next
(even if you have more than one type).
Wages, salaries, etc. Wages,
salaries, tips, professional fees, bonuses, and other amounts you receive for
providing personal services are compensation. The IRS treats as compensation
any amount properly shown in box 1 (Wages, tips, other compensation) of Form
W-2, Wage and Tax Statement, provided that amount is reduced by any amount
properly shown in box 11 (Nonqualified plans). Scholarship and fellowship
payments are compensation for IRA purposes only if shown in box 1 of Form W-2.
Commissions. An amount you
receive that is a percentage of profits or sales price is compensation.
Self-employment income. If you
are self-employed (a sole proprietor or a partner), compensation is the net
earnings from your trade or business (provided your personal services are a
material income-producing factor) reduced by the total of:
- The deduction for contributions made on your behalf to
retirement plans, and
- The deduction allowed for the deductible part of your
self-employment taxes.
