What are net earnings from self-employment?
The answer is complex but important for pension practitioners to understand. Since net earnings from self-employment (NESE) are the basis of earned income, [Q 1:10] they are fundamental to determining whether an owner is a self-employed individual, and, if so, what his or her compensation is for plan purposes. NESE are net income from a trade or business conducted as a sole proprietorship by the individual, or a partners distributive share of income from a partnership. [IRC 1402(a).] Service as an employee does not give rise to NESE, except in rare circumstances. [IRC 1402(c)(2).] There are some important clarifications and exclusions. v Income from rental real estate generally is not NESE, unless services are provided with the property. [IRC 1402(a)(1), Reg. 1.1402(a)-4(c).] The regulations clarify this: Payments for the use or occupancy of entire private residences or living quarters in duplex or multiple-housing units are generally rentals from real estate. Except in the case of rea
