As an owner of a Sole Proprietorship, Partnership, Limited Liability Company (LLC) or S-Corp, depending on the type of income you receive, you may be able to participate in your company’s 401(k) plan. (1)
If you are a W-2 employee, including S-Corp owners, you can make contributions up to the 2020 annual deferral limit. Contributions based on W-2 wages are made by deferring through each payroll. Employer match and profit sharing contributions will be made at the same time as other employees in the plan. The highest rate of compensation you may defer is 92.35% for most states to cover Social Security and Medicare. (2)
If you receive guaranteed payments, you can contribute up to $19,500 ($26,000 if age 50 or over) or 100% of guaranteed payments per year, whichever is less. You can make owner’s draws if you receive guaranteed payments or self-employment wages as long as your company is an eligible entity type for owner’s draws. In addition, your contributions may be limited to only a proportion of what other employees are contributing unless you have a Safe Harbor plan.
Contributions based on self-employed income as reported on K-1 or Schedule C are made before your tax filing deadline. This includes any employer matching and profit sharing.
(1) This information is provided for general education purposes only and does not take into consideration your specific circumstances. You should contact a tax professional to determine what types of contributions you are eligible to make to your company’s 401(k) plan.
(2) Employees in CA and some other states can typically contribute up to 91.45% of earnings which covers CA SDI, social security and medicare.