The Smart S-Corp Owner’s Guide to Solo 401(k) Contributions

💼 The Smart S-Corp Owner’s Guide to Solo 401(k) Contributions — How to Maximize Your 2026 Limits

If you run an S Corporation, one question always comes up: “How much can I actually contribute to my Solo 401(k) this year?”
Unlike sole proprietors, S-Corp owners are bound by a single number — your W-2 wage.
The way you structure that salary determines your contribution limits, retirement savings, and total tax reduction.

Table of Contents

1️⃣ Why W-2 Is Everything for S-Corp Owners
2️⃣ Employee Deferral — How Much You Can Contribute Personally
3️⃣ Employer Contribution — The 25% Rule Explained
4️⃣ Real-World Examples With Different Salary Levels
5️⃣ Common Mistakes S-Corp Owners Make
Disclaimer

1️⃣ Why W-2 Is Everything for S-Corp Owners

Solo 401(k) contributions are split into two main parts:

① Employee Elective Deferral
② Employer Contribution

For S-Corps, both of these are based strictly on your W-2 wage, not distributions or business profit.
That means your retirement limits depend entirely on how you set your salary — not on how much the business makes.

📌 Key Rules
• You cannot use distributions to fund Solo 401(k) contributions
• All math uses W-2 Box 1 wages
• Low salary = low contribution limit (and lower tax savings)

2️⃣ Employee Deferral — Your Personal Contribution

As an employee of your own S-Corp, you can defer up to:

💡 2025 Employee Deferral Limits
• Up to $23,000
• Age 50+: $23,000 + $7,500 catch-up = $30,500
• Can be Traditional or Roth (depending on plan rules)

You must have at least that amount of W-2 wages.
Example: If your salary is $18,000, the deferral cannot exceed $18,000.

3️⃣ Employer Contribution — The 25% Rule Explained

Your S-Corp contributes as the employer.
The maximum employer contribution for S-Corp owners is:

📌 Employer Contribution Formula (S-Corp)
25% × W-2 Box 1 wage
(This simplified 25% rate is the official IRS method for corporations)

For example, if you pay yourself a $72,000 salary:

📘 Example
Employer Contribution = 25% × $72,000 = $18,000

Combined employer + employee contributions cannot exceed the overall Solo 401(k) limit:
• $69,000 (under age 50)
• $76,500 (age 50+)

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4️⃣ Real-World Examples With Updated Numbers

📊 Example 1 — Salary $50,000

• Employee Deferral: $23,000
• Employer Contribution: $50,000 × 25% = $12,500
• Total: $35,500

✔ Lower salaries dramatically limit employer contributions.

📊 Example 2 — Salary $95,000

• Employee Deferral: $23,000
• Employer Contribution: $95,000 × 25% = $23,750
• Total: $46,750

✔ Increasing W-2 increases retirement limits — and your tax deduction.

📊 Example 3 — Salary $180,000 (high-income owner)

• Employee Deferral: $23,000
• Employer Contribution: $180,000 × 25% = $45,000
• Total Potential: $68,000

Stay under the IRS cap of $69,000.

5️⃣ Common Mistakes S-Corp Owners Make

🚨 Top Mistakes
• Believing distributions count as eligible compensation
• Setting W-2 salary too low to make meaningful contributions
• Applying the sole proprietor 20% formula to S-Corps
• Adding employees but still trying to use a Solo 401(k) (not allowed)

When structured correctly, a Solo 401(k) is one of the most powerful tax-saving tools available.
The key is planning: set your W-2 salary intentionally early in the year rather than scrambling in December.

⚖️ Disclaimer
This post is based on 2025 income limits for the 2026 filing season.
State tax rules may differ. This article is for educational purposes only and is not personalized tax advice.

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