Baseline rule for S‑corp owner‑employees: contributions must be based on W‑2 wages

• S‑corp shareholder distributions are not “compensation” for retirement plan purposes. Contributions to a 401(k) or any self‑employed plan must be based on W‑2 wages paid by the S corporation to the owner as a common‑law employee; distributions to the shareholder cannot drive plan contributions Retirement plan FAQs regarding contributions – S corporation | IRS.

• If you are a common‑law employee of the S‑corp, you may defer salary into a 401(k), and the S‑corp may make matching/profit‑sharing contributions based on that W‑2 compensation, subject to annual limits and plan terms Retirement plan FAQs regarding contributions – S corporation | IRS.

Planning implications

• Pay yourself enough W‑2 wages to support the retirement contributions you want (e.g., to reach employer profit‑sharing maximums or to accrue defined benefit credits).

• You cannot bypass wages by using S‑corp distributions to “fund” retirement contributions Retirement plan FAQs regarding contributions – S corporation | IRS.

Solo 401(k) plans (traditional and Roth)

A Solo 401(k) (sometimes called an “individual 401(k)”) is a qualified plan sponsored by your corporation for yourself (and your spouse, if on payroll), allowing salary deferrals and employer profit‑sharing contributions.

• Key features and limits

  • Elective deferrals (employee side): employees may defer compensation under a qualified cash or deferred arrangement (CODA), up to the annual 401(k) limit. For 2025, the elective deferral limit is $23,500; catch‑up contributions for age‑50+ remain $7,500 (limits adjusted periodically) Notice 2024‑80 | IRS (PDF: Notice 2024‑80).

  • Roth option: many 401(k)s allow a designated Roth account. Roth deferrals are included in income when contributed, require separate accounting, and qualified distributions (generally after 5 years and age 59½/ death/ disability) are tax‑free Roth account in your retirement plan | IRS.

  • Employer contributions: the corporation may make matching and/or profit‑sharing contributions. Deductible employer contributions made after year‑end and on or before the corporate return due date (including extensions) are deemed made on the last day of the prior year for deduction purposes if allocated appropriately Issue Snapshot—Deductibility of employer contributions to a 401(k) plan made after the end of the tax year | IRS.

  • Allocation timing: to count as annual additions for the plan’s limitation year, employer contributions must be paid to the plan no later than 30 days after the end of the §404(a)(6) period (the extended tax return due date) Issue Snapshot—Deductibility and allocation timing | IRS.

  • Establishment timing: plans can be adopted retroactively by the tax return due date (including extensions) in certain cases, but CODA (salary deferral) elections generally cannot be made retroactively; they must be in place before compensation is “currently available.” (The special first‑year retroactive deferral rule applies to certain sole proprietors, not S‑corp owners) Issue Snapshot—Establishing a plan and CODA timing | IRS.

• Required minimum distributions (RMDs)
  401(k) plans must include RMD provisions; distributions must begin by the required beginning date. See RMD overview and rules Required minimum distribution (RMD) | IRS.

• Pros and cons for S‑corp owners

  • Pros

    • Highest flexibility: combine elective deferrals (traditional or Roth) plus employer contributions to accelerate savings Roth account in your retirement plan | IRS and Issue Snapshot—Deductibility timing | IRS.

    • Roth deferrals allow tax diversification; qualified Roth distributions are tax‑free Roth account in your retirement plan | IRS.

    • Employer contributions are deductible to the corporation if timely funded and properly allocated Issue Snapshot—Deductibility timing | IRS.

  • Cons

    • Requires payroll and sufficient W‑2 wages; distributions cannot be used to “fund” deferrals or profit‑sharing Retirement plan FAQs regarding contributions – S corporation | IRS.

    • Ongoing compliance: plan documents, employee notices (if applicable), nondiscrimination testing if non‑owner employees are covered, and Form 5500 filing once thresholds are met Publication 560 (2024) | IRS and Form 5500 Corner | IRS.

SEP IRA (employer‑funded only)

A SEP IRA is an IRA‑based plan funded solely by employer contributions. Employees do not make salary deferrals to SEP IRAs, and contributions go into IRAs established for each eligible employee.

• Key features and limits

  • Employer contributions only: the S‑corp contributes to SEP‑IRAs for eligible employees; the employer can vary annual contributions and even skip years, subject to plan terms and nondiscrimination rules Simplified Employee Pension plan (SEP) | IRS.

  • Contribution limit: the annual limit is the lesser of 25% of compensation or a dollar cap. For 2025, the cap is $70,000 (2024 cap is $69,000), indexed annually Notice 2024‑80 | IRS (PDF: Notice 2024‑80) and SEP plan—Operate and maintain | IRS.

  • Compensation cap: compensation considered for plan purposes is limited (e.g., $350,000 for 2025); SEP contribution percentage applies to W‑2 compensation for S‑corp owner‑employees Notice 2024‑80 | IRS (PDF: Notice 2024‑80).

  • Setup and reporting: easy to establish (e.g., Form 5305‑SEP), no employer Form 5500 filing; you must provide employee notices and follow plan terms Form 5305‑SEP (Model SEP) | IRS and SEP plan—Establish a plan | IRS.

• Pros and cons for S‑corp owners

  • Pros

    • Simple and low‑cost to operate; no employee elective deferrals or complex payroll coordination Simplified Employee Pension plan (SEP) | IRS.

    • Flexible employer contributions: choose the percentage each year (subject to uniformity and nondiscrimination under the plan document) SEP plan—Operate and maintain | IRS.

  • Cons

    • No employee (owner) salary deferrals and no Roth option; all contributions are employer‑funded Simplified Employee Pension plan (SEP) | IRS.

    • Contributions must be based on W‑2 wages, not shareholder distributions; the deferral flexibility available in a Solo 401(k) is absent Retirement plan FAQs regarding contributions – S corporation | IRS.

Defined benefit (DB) plans

A corporate DB plan promises a formula‑based retirement benefit (e.g., a life annuity of a stated percentage of pay per year of service). DB plans can allow much higher annual deductible contributions than DC plans, depending on age and benefits targeted, but they carry complex funding and compliance obligations.

• Key features and limits

  • Benefit limit: annual DB benefits are capped (e.g., $280,000 for 2025), subject to actuarial adjustments and service limitations Publication 560 (2024) | IRS and Notice 2024‑80 | IRS (PDF: Notice 2024‑80).

  • Funding and deductions: contributions must meet minimum funding standards, and employer deductions are based on actuarial determinations; DB plans generally require Form 5500 filing and actuarial schedules Publication 560 (2024) | IRS and Form 5500 Corner | IRS.

  • RMDs: DB plans must comply with distribution rules; benefits must begin by the required beginning date Required minimum distribution (RMD) | IRS.

• Pros and cons for S‑corp owners

  • Pros

    • Potentially the largest deductible contributions (especially for older owners seeking to accelerate savings), subject to actuarial limits and benefit caps Publication 560 (2024) | IRS.

  • Cons

    • Highest complexity and cost: actuarial valuations, minimum funding requirements, Form 5500 with actuarial attachments, and stricter amendment/termination constraints Publication 560 (2024) | IRS.

    • Contributions and benefits must be based on W‑2 compensation; shareholder distributions cannot substitute for plan “compensation” Retirement plan FAQs regarding contributions – S corporation | IRS.

Strategic comparison for S‑corp owners

• Solo 401(k): best for owners who want both elective deferrals (traditional or Roth) and employer contributions. You’ll need timely CODA elections and payroll to support deferrals; employer contributions can be funded by the corporate return due date (including extensions) and still count for the prior year if allocated properly Issue Snapshot—CODA and §404(a)(6) timing | IRS and Roth account in your retirement plan | IRS.

• SEP IRA: simplest employer‑only option with generous limits, but no Roth deferral and less contribution flexibility than Solo 401(k) for maximizing owner deferrals; still requires adequate W‑2 wages Simplified Employee Pension plan (SEP) | IRS and Retirement plan FAQs regarding contributions – S corporation | IRS.

• Defined benefit: potentially largest contributions and fastest accumulation for older/high‑compensation owners, at a higher administrative burden and funding risk; works best when stable cash flow supports required contributions Publication 560 (2024) | IRS.

Practical compliance checklist (S‑corp focus)

• Pay sufficient W‑2 wages to support the desired contributions; remember, shareholder distributions are not compensation for plan purposes Retirement plan FAQs regarding contributions – S corporation | IRS.

• Solo 401(k):

  • Adopt the plan timely; have CODA elections in place before compensation is currently available; operate Roth accounts with separate accounting; follow rollover and distribution rules Issue Snapshot—CODA timing | IRS and Roth account in your retirement plan | IRS.

  • Fund employer contributions by the tax return due date (including extensions) to deduct them for the prior year and allocate them timely under §415 Issue Snapshot—Deductibility and allocation timing | IRS.

• SEP IRA:

  • Use approved model documents (e.g., Form 5305‑SEP); provide notices; contribute uniformly per plan formula; stay within %‑of‑comp and dollar limits Form 5305‑SEP | IRS and SEP plan—Establish & Operate | IRS.

• Defined benefit:

  • Engage an actuary; meet minimum funding; file Form 5500 with actuarial schedules; monitor benefit/compensation limits Publication 560 (2024) | IRS and Form 5500 Corner | IRS.

Bottom line

For S‑corp owners, the “right” plan depends on how you balance flexibility, limits, and administrative complexity—and how much W‑2 compensation you are willing to pay yourself to support contributions. A Solo 401(k) offers the most flexible blend of deferrals (traditional and Roth) plus employer contributions. A SEP IRA is the simplest employer‑funded vehicle. A defined benefit plan can deliver the largest deductible contributions but at the highest compliance and funding burden. In all cases, plan contributions must be based on W‑2 wages—not shareholder distributions—which is the most important planning lever in the S‑corp context Retirement plan FAQs regarding contributions – S corporation | IRS.