It's based on W-2 earnings. For 2007, you can contribute up to $15,500 of W-2 earnings. If you're 50 or older, you can contribute an additional $5,000

For an S corporation, you can also make a profit sharing contribution of up to 25% of W-2 earnings.

The total maximum contribution (salary deferral plus profit sharing) is $45,000 ($50,000 is you're 50 or older).

It's based upon the $55,000 salary. Pass thru compensation is not includable in your compensation for contribution and testing purposes. Basically look at it like...if you want to get use of it in the retirement plan then you're going to have to pay the payroll taxes. At your income level you're only slightly ahead in making the contribution (ie your tax savings are only slightly more than the taxes you pay). You've pretty much maxed your contribution unless you pay yourself more of a salary on thelast paycheck or pay yourself a bonus.

As your income grows you will go up in tax rate and you will want to increase your w-2 wages and put more away.