Qualified Plan A qualified retirement plan is a written plan you can set up forthe exclusive benefit of your employees and their beneficiaries. It issometimes called a Keogh or H.R.10 plan. You, or you and your employees, can make contributions to the plan.If your plan meets the qualification requirements, you can generallydeduct your contributions to the plan. For more information, seePublication 560. Your employees generally are not taxed on your contributions orincreases in the plan's assets until they are distributed. However,certain loans made from qualified plans are treated as taxabledistributions. For more information, see Publication 575. Qualification requirements.To be a qualified plan, the plan must meet many requirements. Theyinclude requirements that determine the following. Who must be covered by the plan. How contributions to the plan are to be invested. How contributions to the plan and benefits under the planare to be determined. How much of an employee's interest in the plan must beguaranteed (vested). For more information, see Publication 560. More than one job.If you are self-employed and also work for someone else, you canparticipate in retirement plans for both jobs. Generally, yourparticipation in a retirement plan for one job does not affect yourparticipation in a plan for the other job. However, if you have anIRA, you may not be allowed to deduct part or all of your IRAcontributions. See Publication 590. Kinds of Qualified Plans There are two basic kinds of qualified retirement plans: definedcontribution plans and defined benefit plans. Defined Contribution Plan This plan provides for a separate account for each person coveredby the plan. Benefits are based only on amounts contributed to orallocated to each account. There are two types of defined contribution plans: profit-sharingand money purchase pension. Profit-sharing plan.This plan lets your employees or their beneficiaries share in theprofits of your business. The plan must have a definite formula forallocating the contribution among the participating employees and fordistributing the accumulated funds in the plan. Money purchase pension plan.Under this plan, contributions fixed and are not based on yourbusiness profits. For example, if the plan requires contributions be10% of each participating employee's compensation regardless ofwhether you have a profit, the plan is a money purchase pension plan. Defined Benefit Plan This is any plan that is not a defined contribution plan. Ingeneral, contributions to a qualified defined benefit plan are basedon what is needed to provide definitely determinable benefits to planparticipants. Your contributions to the plan are based on actuarialassumptions. Generally, you will need continuing professional help toadminister a defined benefit plan. Setting Up a Plan You must adopt a written plan. The plan can be an IRS-approvedmaster or prototype plan offered by a sponsoring organization. Or itcan be an individually designed plan. Master or prototype plans.The following sponsoring organizations generally can provideIRS-approved master or prototype plans. Trade or professional organizations. Banks (including savings and loan associations and federallyinsured credit unions). Insurance companies. Mutual funds. Adoption of a master or prototype plan does not mean your planis automatically qualified. It must still meet all the qualificationrequirements stated in the law. Individually designed plan.If you prefer, you can set up an individually designed plan to meetspecific needs. Although advance IRS approval is not required, you canapply for approval by paying a fee and requesting a determinationletter. You may need professional help with this. Revenue Procedure2000-6 in Internal Revenue Bulletin 2000-1 can help youdecide whether to apply for approval. Deduction Limit The deduction limit for contributions to a qualified plan dependson the kind of plan you have. Caution: In figuring the deduction for contributions to these plans, youcannot take into account any contributions or benefits that are morethan the limits discussed under Limits on Contributions andBenefits in Publication 560. Defined contribution plans.The deduction limit for a defined contribution plan depends onwhether it is a profit-sharing plan or a money purchase pension plan. Profit-sharing plan.Your deduction for contributions to a profit-sharing plan cannot bemore than 15% of the compensation paid (or accrued) during the year tothe eligible employees participating in the plan. You must reduce thislimit in figuring the deduction for contributions you make for yourown account. See Deduction of contributions for yourself,later. Money purchase pension plan.Your deduction for contributions to a money purchase pension planis generally limited to 25% of the compensation paid during the yearto a participating eligible employee. You must reduce this limit infiguring the deduction for contributions you make for yourself, asdiscussed later. Defined benefit plans.An actuary must figure the deduction for contributions to a definedbenefit plan since it is based on actuarial assumptions andcomputations. Deduction of contributions for yourself.To take a deduction for contributions you make to a plan foryourself, you must have net earnings from the trade or business forwhich the plan was set up. Limit on deduction.If the qualified plan is a profit-sharing plan, your deduction foryourself is limited to the lesser of $30,000 or 13.0435% (15% reducedas discussed below) of your net earnings from the trade or businessthat has the plan. If the plan is a money purchase plan, the deductionis limited to the lesser of $30,000 or 20% (25% reduced as discussedlater) of your net earnings. Net earnings.Your net earnings must be from self-employment in a trade orbusiness in which your personal services are a materialincome-producing factor. Your net earnings do not include itemsexcluded from income (or deductions related to that income), otherthan foreign earned income and foreign housing cost amounts. Your net earnings are your business gross income minus theallowable business deductions from that business. Allowable businessdeductions include contributions to SEP and qualified plans forcommon-law employees and the deduction for one-half yourself-employment tax. Net earnings include a partner's distributive share of partnershipincome or loss (other than separately stated items such as capitalgains and losses) and any guaranteed payments. If you are a limitedpartner, net earnings include only guaranteed payments for servicesrendered to or for the partnership. For more information, seePartners under Who Must Pay Self-Employment Taxin Publication 533. Net earnings do not include income passed through to shareholdersof S corporations. Adjustments.You must reduce your net earnings by the deduction for one-halfyour self-employment tax. Also, net earnings must be reduced by thededuction for contributions you make for yourself. This reduction ismade indirectly, as explained next. Net earnings reduced by adjusting contribution rate.You must reduce net earnings by your deduction for contributionsfor yourself. The deduction and the net earnings depend on each other.You make the adjustment indirectly by reducing the contribution ratecalled for in the plan and using the reduced rate to figure yourmaximum deduction for contributions for yourself. Annual compensation limit.You generally cannot take into account more than $170,000 of yourcompensation in figuring your contribution to a defined contributionplan. Figuring Your Deduction Use the following worksheet to find the reduced contribution ratefor yourself. Make no reduction to the contribution rate for anycommon-law employees. Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (forexample, 10 1/2% = .105)            2) Rate in line 1 plus 1(for example, .105 + 1 = 1.105)            3) Self-employed rate as a decimal rounded to atleast 3 decimal places (line 1 line 2)            Now that you have figured your self-employed rate, you can figureyour maximum deduction for contributions for yourself by completingthe following steps. Deduction Worksheet for Self-Employed Step 1  Enter the rate shown on line 3above            Step 2  Enter your net earnings (net profit)from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ(Form 1040); line 36, Schedule F (Form 1040); or line 15a, ScheduleK-1 (Form 1065)            Step 3  Enter your deduction forself-employment tax from line 27, Form 1040            Step 4  Subtract step 3 from step 2 andenter the result            Step 5  Multiply step 4 by step 1 and enterthe result            Step 6  Multiply $170,000 by your plancontribution rate. Enter the result, but not more than $30,000            Step 7  Enter the lesser of step 5 or step6. This is your maximum deductible contribution. Enter yourdeduction on line 29, Form 1040            Example.You are a self-employed farmer and you have employees. The terms ofyour plan provide that you contribute 8 1/2% (.085) ofyour compensation (defined earlier) and 8 1/2% of yourparticipants' compensation. Your net earnings from line 36, Schedule F(Form 1040) are $200,000. In figuring this, you deducted yourparticipants' pay of $100,000 and contributions for them of $8,500 (8 1/2% x $100,000). You figure your self-employed rate andmaximum deduction for contributions on behalf of yourself as follows. Rate Worksheet for Self-Employed 1) Plan contribution rate as a decimal (forexample, 10 1/2% = .105)      0.085 2) Rate in line 1 plus 1(for example, .105 + 1 = 1.105)      1.085 3) Self-employed rate as a decimal rounded to atleast 3 decimal places (line 1 line 2)      0.078 Deduction Worksheet for Self-Employed Step 1  Enter the rate shown online 3above      0.078 Step 2  Enter your net earnings (net profit)from line 31, Schedule C (Form 1040); line 3, Schedule C-EZ(Form 1040); line 36, Schedule F (Form 1040); or line 15a, ScheduleK-1 (Form 1065)   $200,000 Step 3  Enter your deduction forself-employment tax from line 27, Form 1040      7,403 Step 4  Subtract step 3 from step 2 andenter the result    192,597 Step 5  Multiply step 4 by step 1 and enterthe result     15,023 Step 6  Multiply $170,000 by your plancontribution rate. Enter the result but not more than $30,000     14,450 Step 7  Enter the lesser of step 5 or step6. This is your maximum deductible contribution. Enter yourdeduction on line 29, Form 1040   $ 14,450 discount hotels in KrakowWhen to make contributions.To take a deduction for contributions for a particular year, youmust make the contributions not later than the due date (generally,April 15 for calendar year taxpayers), plus extensions, of your taxreturn for that year. More information.See Publication 560 for more information on retirement plans forsmall business owners, including the self-employed. Publication 560also discusses the reporting forms that must be filed for these plans.