Comparing LLC and S corp retirement plans comes down to one mechanical difference: an LLC taxed as a sole proprietorship calculates contributions from net earnings from self-employment, while an S corp calculates them only from the owner’s W-2 salary. At identical profit levels, the LLC almost always wins on maximum contribution. The S corp wins on payroll tax savings. Whether the FICA savings outweigh the smaller retirement contribution is the whole planning question.
Why the Contribution Base Is Different
A single-member LLC that hasn’t elected corporate tax treatment is a disregarded entity. Business profit flows to Schedule C, and the owner pays self-employment tax at a combined 15.3% (12.4% Social Security plus 2.9% Medicare).1Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) For retirement plan math, you start with net profit and subtract the deductible half of that self-employment tax. The result is net earnings from self-employment, or NESE, and it’s the base your plan contributions are measured against.2Internal Revenue Service. Simplified Employee Pension Plan (SEP) – Section: Contribution Limits
When an LLC elects S corp status, the owner-employee must take a W-2 salary. Only that salary counts as compensation for retirement plan purposes. Any remaining profit passes through on a K-1 as a distribution: it escapes FICA, but it can’t be used to build a retirement contribution. Every dollar shifted from salary to distribution is a dollar of payroll tax savings and a dollar removed from the plan’s contribution ceiling.
Which Structure Contributes More at the Same Profit
Assume $150,000 in net business profit for 2026 and an owner under 50. The 2026 elective deferral limit is $24,500, and the total defined-contribution ceiling under Section 415(c) is $72,000.3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
LLC (Sole Proprietorship)
Self-employment tax on $150,000 in profit runs about $21,194, and half of that ($10,597) is deductible. NESE lands near $139,400.2Internal Revenue Service. Simplified Employee Pension Plan (SEP) – Section: Contribution Limits The two common plan choices work out like this:
- SEP IRA: 25% of $139,400 = $34,850
- Solo 401(k): $24,500 employee deferral + $34,850 employer profit-sharing = $59,350
The Solo 401(k) stacks an employee elective deferral on top of the same 25% employer contribution a SEP allows, which is why it dominates at most income levels.4Internal Revenue Service. Retirement Plans for Self-Employed People The employee deferral can be pre-tax or designated Roth.
S Corporation
The S corp owner has to pick a W-2 salary, and that salary is now the ceiling on the 25% employer contribution. Three scenarios at $150,000 in total profit:
- W-2 of $100,000: $24,500 deferral + $25,000 employer = $49,500
- W-2 of $120,000: $24,500 deferral + $30,000 employer = $54,500
- W-2 of $130,000: $24,500 deferral + $32,500 employer = $57,000
To match the LLC’s $59,350 ceiling, the S corp owner needs a W-2 of roughly $140,000, leaving only $10,000 as a distribution. At that point, most of the FICA savings that justify the S corp election have disappeared.
The FICA Savings Trade-Off
The S corp’s core appeal is that distributions escape self-employment tax. With a $100,000 W-2 and $50,000 in distributions, the owner avoids the 15.3% combined rate on that $50,000, saving roughly $7,650. But the retirement contribution drops from $59,350 (LLC) to $49,500 (S corp), a gap of nearly $10,000.
For an owner in their 30s or 40s who won’t touch retirement funds for decades, losing $10,000 of annual tax-deferred contributions can cost more in compounded growth than $7,650 in current-year payroll tax savings. For an owner closer to retirement, or one whose plan is already funded to the ceiling for other reasons, the FICA savings may be the better trade. Run the numbers for your own age, expected returns, and marginal tax rate before assuming either direction.
When the Gap Closes
The Section 415(c) ceiling of $72,000 applies equally to both structures. Once profit is high enough that both the LLC and the S corp can hit that cap, the contribution ceiling is a tie and the S corp’s payroll tax savings become the deciding factor. In practice, that convergence happens above roughly $350,000 in profit. The LLC’s advantage matters most in the $100,000 to $300,000 range where the S corp is still salary-constrained.
High earners who want to save beyond $72,000 can layer on a defined benefit plan. The 2026 annual benefit limit is $290,000, and an actuary calculates the required contribution based on age, income, and target benefit.5Internal Revenue Service. Retirement Plans for Self-Employed People – Section: Defined Benefit Plans Owners in their 50s and 60s can often contribute well over $100,000 annually. The catch for S corp owners: the actuarial calculation runs off the W-2 salary, so an S corp owner who kept the salary low for FICA reasons may have to raise it substantially to justify a large defined benefit contribution.
The Reasonable Salary Constraint
S corp owners can’t simply pick a low salary to maximize distributions. The IRS requires “reasonable compensation” for the services the owner performs, evaluated against factors like training, experience, time devoted to the business, comparable wages for similar roles, and the company’s distribution history.6Internal Revenue Service. Wage Compensation for S Corporation Officers If the IRS determines a salary is unreasonably low, it can reclassify distributions as wages and assess back payroll taxes, penalties, and interest. In at least one court case, the entire distributive share was recharacterized as wages.
This constraint puts a floor under the S corp’s W-2 and therefore a floor under the retirement contribution ceiling as well. But it also means an owner paying $40,000 in salary on $300,000 of profit is running a real audit risk on top of a reduced retirement contribution.
2026 Limits That Drive the Comparison
The numbers above rely on the 2026 inflation-adjusted limits:3Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
- Employee 401(k) elective deferral: $24,500
- Catch-up contribution (age 50+): $8,000
- Enhanced catch-up (ages 60–63): $11,250
- Total defined contribution limit (Section 415(c)): $72,000
- Maximum compensation considered: $360,000
- Defined benefit annual benefit limit: $290,000
The enhanced catch-up for ages 60 through 63 is a SECURE 2.0 provision that took effect in 2025. It replaces the standard $8,000 catch-up with $11,250, pushing the total ceiling to $83,250 for owners in that age bracket. This applies to both LLC and S corp owners.
Deadlines That Can Cost You the Year
The plan you pick sets the establishment deadline, and missing it wipes out the year’s contribution.
A SEP IRA can be established and funded as late as the business’s tax filing deadline including extensions.7Internal Revenue Service. Retirement Plans FAQs Regarding SEPs For a sole proprietor on extension, that can be October 15 of the following year. It’s the most forgiving option when tax planning happens late.
A Solo 401(k) or S corp 401(k) must be established by December 31 of the tax year it covers. Plan documents need to be executed by that date. Employee deferrals must be elected before the income is earned; the employer profit-sharing piece can be funded up to the tax filing deadline including extensions.4Internal Revenue Service. Retirement Plans for Self-Employed People For an S corp, the deferrals also have to run through payroll during the tax year, which means coordinating with your payroll provider well before year-end. Miss December 31 and the deferral portion is gone for that year.
Choosing Between Them
If retirement contributions are the priority and profit sits in the $100,000 to $300,000 range, the LLC taxed as a sole proprietorship contributes more. If payroll tax savings matter more than incremental retirement contributions, and the reasonable-salary requirement still leaves room for meaningful distributions, the S corp comes out ahead on current-year cash. Above roughly $350,000 in profit, both structures hit the same $72,000 ceiling, and the S corp’s FICA savings tip the balance without costing anything in retirement capacity. Model both under your own numbers before electing, because the S corp election is easy to make and considerably harder to unwind.