Can S Corp Owners Contribute to a 401(k)? Limits and W-2 Rules

An S Corp owner can contribute to a 401(k), but the contribution has to be built on W-2 wages the corporation pays the owner as an employee. Schedule K-1 pass-through profits do not count. For 2026, the combined employee-plus-employer ceiling is $72,000 for owners under 50, $80,000 for those 50 to 59 or 64 and older, and $83,250 for those aged 60 through 63 under the SECURE 2.0 enhanced catch-up.

Why Only W-2 Wages Count

The IRS treats an S Corp shareholder who performs services for the business as a common-law employee.¹ So if you want a 401(k), you have to run payroll, pay yourself a salary, and receive a W-2. That salary is the only income the plan sees. Distributions you take as an owner, reported on Schedule K-1, are invisible to the 401(k).

Every dollar you put into the plan has to trace back to your W-2 compensation. Set your salary at $60,000 and take another $150,000 in distributions, and the plan works off $60,000. That creates a hard ceiling on both your employee deferral and your employer profit-sharing contribution.

The Reasonable Compensation Rule

The IRS requires that an S Corp owner’s W-2 salary be reasonable for the services performed. Setting the salary artificially low to minimize payroll taxes while maximizing distributions is one of the most common audit triggers for S Corporations. In evaluating reasonable compensation, the IRS looks at training and experience, duties and responsibilities, time devoted to the business, what comparable businesses pay for similar work, and the company’s dividend history.² If the salary is deemed unreasonably low, the IRS can reclassify distributions as wages, triggering back payroll taxes, penalties, and interest.

The retirement-plan flip side matters just as much: a salary set too low permanently caps how much you can put into the 401(k) that year.

Health Insurance Premiums in the Base

If you own more than 2% of the S Corp and the company pays your health insurance, those premiums are included in Box 1 of your W-2 but excluded from Boxes 3 and 5, so they aren’t subject to Social Security and Medicare taxes.² Because the premiums show up in gross income on the W-2, they count toward Section 415 compensation for retirement plan purposes.³ That slightly enlarges the base for the 25% employer profit-sharing calculation.

2026 Contribution Limits

Your total 401(k) contribution has two components: your employee salary deferral and the employer profit-sharing contribution from the S Corp. Both are calculated from W-2 wages, and the combined total can’t exceed the Section 415(c) overall limit.

Employee Deferral

For 2026, you can defer up to $24,500 of your W-2 salary into your 401(k).⁴ The deferral can go entirely into a traditional pre-tax account, entirely into Roth, or any mix. It can equal up to 100% of your W-2 wages as long as it stays within the $24,500 cap. Deferrals have to be withheld through payroll at the time wages are paid.

Catch-Up Contributions

Turn 50 at any point in 2026 and you can add another $8,000, bringing your employee ceiling to $32,500. Under the SECURE 2.0 Act, participants aged 60 through 63 during 2026 get a higher catch-up of $11,250 instead of $8,000, pushing the employee maximum to $35,750.⁴ At age 64 and beyond, the catch-up drops back to $8,000.

Employer Profit-Sharing Contribution

The S Corp, acting as the employer, can make a profit-sharing contribution on your behalf of up to 25% of your W-2 compensation.⁵ That 25% is applied to total W-2 wages including pre-tax elective deferrals, because Section 415 compensation counts those amounts.³ The contribution is fully deductible to the corporation.

The Overall Limit

The Section 415(c) ceiling on employee deferral plus employer contribution is $72,000 for 2026.⁶ Catch-ups sit on top of that, so the practical maximums are:

Under 50: $72,000
Age 50 to 59, or 64 and older: $80,000
Age 60 through 63: $83,250

A compensation cap also applies: only the first $360,000 of W-2 wages can be considered for 401(k) purposes in 2026.⁶ In most cases the $72,000 overall limit bites first, but the cap matters when running the 25% math on a high salary.

A Worked Example

Say you’re 45 and set your W-2 salary at $100,000 for 2026. You defer $24,500 as the employee. The S Corp adds a profit-sharing contribution of $25,000 (25% of $100,000). Total: $49,500, comfortably under the $72,000 ceiling.

Bump the salary to $200,000 and the deferral stays at $24,500, but the profit-sharing contribution can reach $50,000. That combined $74,500 exceeds the $72,000 overall limit, so the employer piece drops to $47,500 to bring the total to exactly $72,000.

The breakeven salary where the full $72,000 is reachable without the 25% cap constraining you is $190,000. At that level, 25% equals $47,500, and $47,500 plus a $24,500 deferral hits $72,000 on the nose. Below $190,000 in W-2 wages, the 25% employer limit will prevent you from reaching the overall maximum.

Solo 401(k) or Traditional 401(k)

If the S Corp has no employees other than you and possibly a spouse, a solo 401(k) is designed for exactly this situation.⁷ You wear both hats, making employee deferrals and directing the employer contribution, and the plan is exempt from the nondiscrimination testing that applies to plans with rank-and-file employees. Administration is minimal.

Once the S Corp hires common-law employees beyond a spouse, the plan has to be offered to all eligible employees and becomes subject to annual Actual Deferral Percentage and Actual Contribution Percentage tests. Adopting a safe harbor 401(k) is one way to sidestep that testing in exchange for specific employer contributions.⁸

Roth Options

Employee deferrals can be directed into a Roth 401(k) account within the plan if the plan document allows it. Roth contributions don’t reduce current-year taxable income, but qualified withdrawals are tax-free. For owners who expect a higher tax bracket later, or who want tax diversification, Roth deferrals earn their place.

The SECURE 2.0 Act also lets employer profit-sharing contributions be designated as Roth when the plan permits.⁹ Choosing Roth on the employer piece includes the contribution in taxable income the year it’s made, but it grows and comes out tax-free. Not every plan document has added this feature yet; confirm with the plan administrator.

Starting in 2027, catch-up contributions for participants who earned more than a specified FICA wage threshold in the prior year will be required to go into a Roth account.¹⁰ For 2026, catch-ups can still be either pre-tax or Roth at your election.

Setting Up the Plan

A 401(k) requires a written plan document covering eligibility, contribution formulas, and distribution rules. If you want to make employee salary deferrals for a given tax year, the plan has to be in place by the end of that year, because deferrals are withheld from wages as they’re paid. A plan established only for employer profit-sharing contributions can be adopted as late as the S Corp’s tax filing deadline, including extensions.¹¹

Most owners set up through a brokerage or plan provider using a pre-approved document. Whatever the source, make sure the document reflects every feature you plan to use, including Roth deferrals, Roth employer contributions, and loans if you want them.

Ongoing Compliance

Form 5500-EZ

A one-participant 401(k) has to file Form 5500-EZ once total plan assets reach $250,000 at year-end.⁷ Below that threshold, no annual return is required. The form is due by the last day of the seventh month after the plan year ends — July 31 for a calendar-year plan.¹² If the S Corp has non-owner employees, the more detailed Form 5500 applies.

The late-filing penalty runs $250 per day per return, up to $150,000 per form.¹³ The IRS offers a relief program for late filers, but calendaring the deadline is far cheaper than fixing a miss.

Depositing Deferrals on Time

Employee deferrals have to be deposited into the 401(k) trust as soon as they can reasonably be separated from company assets. For small plans with fewer than 100 participants, the Department of Labor’s safe harbor is seven business days from the payroll date.¹⁴ Late deposits are prohibited transactions and can trigger excise taxes and correction requirements. Build the deposit into your payroll routine.

W-2 Reporting

Your employee deferrals show up in Box 12 of the W-2 with code D for traditional or code AA for Roth. Box 1 wages are reduced by pre-tax deferrals but not by Roth deferrals. Employer profit-sharing contributions don’t appear on the W-2 at all; they’re deducted on the S Corp’s return. Health insurance premiums paid by the S Corp for a greater-than-2% shareholder appear in Box 1, are excluded from Boxes 3 and 5, and count toward the compensation base used for the 25% employer contribution.² Errors here ripple into wrong contribution limits and compliance headaches, so getting payroll right at the start is worth the attention.

1
Internal Revenue Service. S Corporation Employees, Shareholders, and Corporate Officers
2
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
3
Internal Revenue Service. Chapter 3 Compensation
4
Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
5
Internal Revenue Service. Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits
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Internal Revenue Service. Cost-of-Living Adjusted Limitations for 2026
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Internal Revenue Service. One Participant 401k Plans
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Internal Revenue Service. 401(k) Plan Fix-It Guide – The Plan Failed the 401(k) ADP and ACP Nondiscrimination Tests
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Internal Revenue Service. SECURE 2.0 Act Changes Affect How Businesses Complete Forms W-2
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Internal Revenue Service. Treasury, IRS Issue Final Regulations on New Roth Catch-Up Rule, Other SECURE 2.0 Act Provisions
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Internal Revenue Service. Publication 560 (2025), Retirement Plans for Small Business
12
Internal Revenue Service. About Form 5500-EZ, Annual Return of a One-Participant Retirement Plan or a Foreign Plan
13
Internal Revenue Service. Penalty Relief Program for Form 5500-EZ Late Filers
14
U.S. Department of Labor. Employee Contributions Fact Sheet