S Corp Retirement Plans: Best Options for Owners & Employees
Explore top S Corp retirement plans, including SEP IRAs, Solo 401(k)s, and SIMPLE IRAs, with tax-saving benefits for owners and employees of all company sizes. 6 min read updated on May 13, 2025
Key Takeaways
- S Corp retirement plans can offer significant tax advantages for business owners and employees.
- The best retirement plan depends on your company size, employee count, and contribution preferences.
- SEP IRAs and Solo 401(k)s work well for S Corps with no or few employees.
- SIMPLE IRAs and traditional 401(k)s are better suited for larger S Corps with more workers.
- Contributions are typically based on W-2 wages, not shareholder distributions.
- Proper plan setup is critical for IRS compliance and maximizing tax deferral.
- Hiring family members in an S Corp can open additional retirement contribution opportunities.
S Corp retirement plan options are vast. There are several options, some of which might be a better choice for you than others. If you operate as a very small S Corp, having a retirement plan for employees can cost you between $2,000 and $4,000 a year for administrative and insurance costs. Further, some plans require that the S Corp employer contribute to the employee accounts, at approximately 3–4 percent for each employee.
Advantages of a Small Business Retirement Plan
While there are some disadvantages to the cost of having an S Corp retirement plan for your employees, there are some significant benefits, including:
- An S Corp retirement plan helps secure your business’s future, as well as your employees’ futures.
- Offering a retirement plan for employees gives you a competitive edge over other companies that might not offer a retirement plan.
- There are some tax benefits to having a retirement plan, as plan contributions are deductive business expenses.
How to Choose the Right Plan for Your S Corp
The best S Corp retirement plan depends on factors such as business size, number of employees, and your retirement savings goals. Here’s a quick comparison:
| Plan Type | Best For | Employer Contribution | Max Contribution (2024) | Admin Requirements |
|---|---|---|---|---|
| SEP IRA | Solo or few employees | Up to 25% of wages | $69,000 | Minimal |
| Solo 401(k) | Owner-only or spouse-only firms | Employee + employer | $69,000 ($76,500 if 50+) | Moderate (Form 5500 if >$250K) |
| SIMPLE IRA | 100 or fewer employees | 2% nonelective or 3% match | $16,000 ($19,500 if 50+) | Low |
| Traditional 401(k) | Growing businesses with staff | Up to 25% + deferrals | $69,000 | Higher (Form 5500, compliance testing) |
Choosing the right plan can balance administrative effort, employee retention goals, and long-term tax savings.
Simplified Employee Pension Individual Retirement Account
This type of retirement plan is also referred to as a SEP IRA. Some main benefits to this type of plan include that it is simple to set up and maintain; there is no initial or ongoing fee; there is flexibility in the annual funding requirements; and there are several investment choices.
The employer and employee contribute to this type of retirement plan. Generally, the employer will match what the employee puts in, with a ceiling amount. As of 2018, the limit for contribution is up to 25 percent of the compensation of the employee, with a $55,000 cap.
Other benefits of this type of plan include the fact that the employee can withdraw the funds at any time, although there will be a 10 percent penalty if you are under the age of 59½.
Self-Employed 401(k) Small Business Retirement Plan
This type of retirement plan is for self-employed individuals and businesses with no employees. Similar to a SEP IRA, there are several investment choices available; no initial setup fees; and no ongoing maintenance fees. Both the employee and employer contribute to the 401(k) plan.
The 2018 limits are up to $18,500 in salary deferrals by the employee ($24,500 if you are 50 or older). The employer can contribute up to 25 percent of the employee’s compensation, with a ceiling of $55,000. This type of plan comes with an annual administrative filing requirement if the plan assets are greater than $250,000. The employee cannot withdrawal the funds until a significant event occurs, i.e. disability; plan termination; or turning 59½.
Contribution Rules for S Corp Owners
One critical aspect of S Corp retirement plans is that contributions are based solely on W-2 wages. Unlike sole proprietors or partnerships, S Corp distributions do not count toward retirement plan contribution calculations.
Here’s how this affects S Corp owners:
- Elective deferrals and profit-sharing contributions are calculated based on W-2 wages only.
- If you take a low salary and high distributions, your ability to contribute to a retirement plan is limited.
- To maximize retirement savings, many S Corp owners opt to increase their W-2 salary (while remaining within IRS "reasonable compensation" guidelines).
This is especially relevant in Solo 401(k) plans, where the total contribution limit ($66,000 in 2023; $69,000 in 2024) is split between employee deferral and employer profit sharing.
Hiring Family Members to Maximize Retirement Contributions
S Corp owners often consider hiring family members as a tax strategy, and it can also increase total retirement contributions. If a spouse or child works for the business and earns W-2 wages, they become eligible participants in the company’s retirement plan. This means additional pre-tax or Roth contributions can be made on their behalf.
For example, hiring a spouse who earns $30,000 annually could allow for up to $30,000 in combined elective deferrals and employer contributions in a Solo 401(k), depending on the plan rules and IRS limits. However, compensation must be reasonable, and duties performed should be legitimate to withstand IRS scrutiny.
Simple IRA
This is a retirement plan for businesses with no more than 100 employees or those who are self-employed. Some benefits of this type of retirement plan include salary deferral, several investment choices, and low-cost options of $25/per participant or $350 per plan. Both the employer and employee contribute to this type of plan. In 2018, the salary deferral limit is $12,500 for employees ($15,500 if 50 or older). The employer can either match employee contributions up to 3 percent of their compensation or contribute 2 percent of the employee’s compensation up to $5,500. There are no administrative responsibilities.
The employee can withdrawal the funds at any time by paying a 10 percent penalty if you are under the age of 59½. Furthermore, if you withdraw when the plan is two years old or less, then the penalty will increase to 25 percent. Remember that you will be taxed on the amount you withdrawal in addition to the penalty imposed when withdrawing the funds.
401(k) Small Business Retirement Plan
This type of retirement plan is for any public or private company with 20 or more employees. This is one of the most common types of retirement plans offered by employers. There are several advantages to this type of plan, including flexibility in terms of investment choices, investment management, and participant educational programs. There is also a wide range of mutual fund options.
In 2018, employees can contribute up to $18,500 in deferred salary ($24,500 if you are 50 or older). The total contribution overall cannot exceed $54,000. Employers can choose to match the contribution made by employees or engage in profit sharing contribution up to 25 percent of the employee’s compensation, not exceeding $55,000. Employers must file Form 5500 to ensure that the plan itself isn’t favoring those who are highly compensated in the business.
Frequently Asked Questions
-
What is the best retirement plan for S Corp owners with no employees?
A Solo 401(k) is typically the best option for S Corp owners without employees, offering high contribution limits and flexible investment options. -
Can S Corp distributions be used to calculate retirement contributions?
No, only W-2 wages from the S Corp count toward contribution limits for retirement plans like SEP IRAs and 401(k)s. -
Is a SEP IRA or a Solo 401(k) better for an S Corp?
A Solo 401(k) often allows for higher contributions and Roth options, while SEP IRAs are simpler to administer. The best choice depends on your income level and preference for administrative complexity. -
What happens if my S Corp hires my spouse?
If your spouse earns W-2 wages from your S Corp, they can participate in the business’s retirement plan, allowing you to contribute on their behalf and boost overall household retirement savings. -
Do I need to file any forms for my S Corp retirement plan?
Yes, depending on the plan type and total assets. For example, Solo 401(k)s require filing Form 5500-EZ if assets exceed $250,000.
If you need help finding S Corp retirement plan options, you can post your legal need 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, Menlo Ventures, and Airbnb.
