As an owner of a Sole Proprietorship, Partnership, Limited Liability Company (LLC) or S-Corp, your ability to participate in your business’s 401(k) plan depends on the type of income you receive.
If you are an owner or partner of one of these entity types, you must meet any one of the following criteria to participate in your company’s 401(k) plan:
- Are you a W-2 employee of the business? If so, you make a salary deferral like any other employee of up to $19,000 ($25,000 if over 50) or 100% of wages, whichever is less. You will also be eligible to receive employer contributions and matching. S-Corp owners can only participate if they receive a W-2.
- Do you receive guaranteed payments? If so, you can contribute up to $19,000 ($25,000 0 if over 50) or 100% of guaranteed payments a year, whichever is less. Note: You will want to process these transactions through your payroll provider where possible in order to contribute to your Guideline 401(k).
- Is your business profitable? You can make contributions based on taxable self-employment earnings. This is calculated by your tax preparer at the end of the year and must be deposited before your tax filing deadline. A business owner can contribute up to the lesser of $19,000 ($25,000 if over 50) or 100% of adjusted taxable earnings to his or her 401(k) plan.
Warning: Your contributions may be limited to only a proportion of what other employees are contributing unless you have a Safe Harbor plan. See below for more information.
How Much Can Your Company Contribute To Your 401(k) Account?
If your 401(k) plan includes company contributions to participants, you may be eligible to take part in these contributions subject to certain limitations. A business owner can contribute up to up 25% of adjusted taxable earnings to his or her 401(k) plan (these contributions must be made before your tax filing deadline.) Eligible employees of your company must also receive their fair share of company contributions.
Total combined contributions (contributed by yourself or your company) are limited to $56,000 (plus a $6,000 employee “catch-up” contribution for those over 50). If you have made contributions to your plan during the year but do not have sufficient income, any excess contributions will need to be refunded before your tax filing deadline.
Don't Forget About Compliance Testing
Regardless of the information above, your plan will still be subject to applicable nondiscrimination rules. In general, this means that as a business owner, you will not be able to contribute too much more, either as a percentage of your pay or as a dollar amount, than your other employees, or else you may have to make additional contributions to those employee accounts. You can learn more about compliance testing here.
If you have a Safe Harbor plan, your plan will be exempt from nondiscrimination testing every year. Learn more about Safe Harbor plans here.
The following chart shows how your entity type will affect your contributions as a company owner.
Disclaimer: This information is provided for general education purposes only. You should contact a tax professional to determine what types of contributions you are eligible to make to your company’s 401(k) plan.