An S-Corp 401(k) is beneficial in helping business owners contribute income towards retirement in addition to offering valuable tax deductions. A Solo 401(k) plan is a 401(k) plan for self-employed business owners with no other full-time employees other than the owner and co-owner or spouse, if applicable. 

An S-Corp 401(k), also called a Solo 401(k) or a one-participant 401(k) plan, is clearly recognized by the IRS and follows the same regulations as other 401(k)s with some differences in contribution rules and limits, as explained below. Not only are S-Corp 401(k)s easy to set up and maintain, but they are low cost and there are no complicated forms to complete or difficult tests to perform. 

Contributions

Understand the rules of contribution and limitations of an S-Corp 401(k) before you adopt one. Solo 401(k) contributions consist of contributions via a salary deferral or elective and/or profit-sharing contribution. Calculations are solely based on W-2 reported salary paid to the S-Corp's owner. 

Rules for Contributing to an S-Corp 401(k)

Before adopting a Solo 401(k), take a comprehensive review of your business finances and keep in mind the following rules:

You can only contribute income that is reported on your W-2. 

  • Income and dividends not reported on your W-2, including those reported on your K-1, are not eligible for contribution. This may require extra planning on your part, taking into consideration your self-employment tax liabilities and planned annual plan contributions.
  • However, even with a low W-2 salary through the S-corporation, you will still be able to conduct superior annual contributions to the 401(k) (up to $17,500 if you have at least that much in annual W-2 salary).

You can elect to contribute the annual maximum limit of $18,000 (or $24,000 if you are over 50 years of age).

  • If your annual salary is at least $18,000, you can contribute up to $18,000 annually into your S-Corp 401(k). And, if you are 50 years of age or older, you can make an additional $6,000 annual contribution.
  • These limits are for the year 2017. The 2018 limits are $18,500, or $24,500 if you are age 50 or over. Current limits can also be found on the IRS website.

You can contribute 25 percent of your income, up to a total contribution of $54,000.

  • There is also the non-elective option. To maximize your contribution, business owners can contribute 25 percent of their annual salary, up to $54,000 (in 2017), in addition to the maximum annual elective salary contribution. 
  • The 2018 limit is $55,000.

Contribution Limits of an S-Corp 401(k)

As the business owner, you play two distinct roles in the contribution of your Solo 401(k): employee and employer. Both roles contribute to the plan via the following:

  1. Elective deferrals, where you have the option to contribute or not contribute.
  2. Employer non-elective contributions, where deductions occur according to the rules of the plan.

Profit-Sharing Contributions

Business owners also have the option of a profit-sharing contribution of up to 25 percent of W-2 reported earnings. Profit-sharing contributions are 100 percent tax deductible and commonly tax deductible as a business expense.

Solo 401(k) Calculator

To calculate your annual retirement contribution based on your income, you can use a Solo 401(k) calculator found online.

Deadlines for Contributing to Your S-Corp 401(k)

There are deadlines for contributing to your S-Corporation 401(k). Deferrals or contributions must be made within 15 days of the period in which you are paying yourself. For example, contributions made on December 31, 2017, need to be deposited into the Solo 401(k) by January 15, 2018.

Alternatives to Solo 401(k)

In addition to a Solo 401(k), S-Corporation owners have several options for retirement planning, including the following:

  • Simplified Employee Pensions (SEPs) — pension or retirement plans for business owners and employees that allow of up to 25 percent salary contributions of all employees' salaries. Only the business owner contributes, setting up accounts for each employee. 
  • SIMPLEIRAs— plans in which business owners contribute either through a matched (employee elected) contribution up to 3 percent or a non-elective contribution of 2 percent for each eligible employee. 

If you need help with adopting an S-Corp or Solo 401(k), you can post your legal need or job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.