Owner’s draws are an option for some business owners that earn self-employment income outside of W-2 payroll compensation to make 401(k) contributions.
In general, the following entity types are eligible for owner’s draws. Owner’s of these entities often have self-employment income:
- Limited Partnerships
- LLCs taxed as Partnerships
- Single Member LLCs
- Sole Proprietorships
It’s important to note that this list does not include corporations and LLCs taxed as corporations because owner’s receive compensation paid through payroll as a W-2 wages. Some owners might receive distributions from an S Corporation or an LLC taxed as an S Corporation, but these distributions received as a shareholder of an S Corporation are also not considered earned income for retirement plan purposes according to the IRS. In general, the following entity types are not eligible for an owner’s draws and all contributions for owners must come through payroll.
- LLCs taxed as S Corporations
- LLCs taxed as C Corporations
- Any type of Corporations
If you are eligible and would like to make an owner’s draw, please refer to the article “How do I request an Owner’s Draw?”