3750 / How much may an employer deduct for its contributions to a qualified profit sharing or stock bonus plan?
An employer’s deduction for contributions to a profit sharing or stock bonus plan is the greater of (1) 25 percent of the compensation otherwise paid or accrued during the employer’s taxable year to the beneficiaries of the plan, or (2) the amount the employer is required to contribute under Section 401(k) for the year.1
The amount of annual compensation of each employee taken into account for purposes of this limitation may not exceed $350,000 in 2025 ($345,000 in 2024, $330,000 in 2023, $305,000 in 2022, $290,000 in 2021 and $285,000 in 2020).2 Compensation for this purpose is Section 415(c)(3) compensation, which includes elective deferrals under 401(k) and Section 457 plans, salary reduction contributions to Section 125 cafeteria plans, and qualified transportation fringe benefits under IRC Section 132(f).3 In the case of a self-employed person, “earned income” is used instead of “compensation” ( Q 3827).
Contributions, for purposes of the deduction limit, do not include elective deferrals ( Q 3760), and elective deferrals are not themselves subject to any limitation contained in IRC Section 404.4