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Do I need w-2 wages from my S-corp to make Solo 401k Contributions?
A common question from self-employed individuals is whether they can open and contribute to a Solo 401k if they don’t pay themselves a salary or wages. The short answer is no – you must have earned self-employment income to contribute to a Solo 401k.
In the case of a self-employed individual who operates their business as an S-corporation, self-employment income is the amount of money the individual receives as a salary from the S-corporation. The w-2 wages from the S-corporation are used to calculate the maximum amount of Solo 401k contributions that can be made.
Why you need W-2 wages for Solo 401k contributions
The purpose of a Solo 401k is to provide a tax-advantaged retirement savings vehicle for self-employed business owners. Contributions are based on earned income from self-employment.
Without any W-2 wages (and assuming that the person is not otherwise reporting earned self-employment income such as on Schedule C), there would be no evidence that you worked for or earned self-employment income from your own business. So requiring W-2 self-employment income is key for justifying Solo 401k contributions.
What if you don’t pay yourself wages?
If you have yet to pay yourself wages from your self-employed business, one option is to work with your tax advisor to confirm that you are eligible to receive w-2 wages from your self-employed business taxed as an S-corporation and if so start paying yourself a reasonable wage that aligns with the work you do for your business. Factors that may help determine what constitutes a reasonable wage include your responsibilities, hours worked, what you may pay someone else to do the work, etc. This wage, reported on your W-2, then enables Solo 401k contributions.
Learn more:
Q: When are contributions due?
A: As long as the plan is established by the end of the year, the deadline for all types of Solo 401k contributions (employee, employer, and/or voluntary after-tax) is your business’s tax filing deadline, including extensions.
Q: Do I have to make Solo 401k contributions through the payroll provider?
A: No, you do not have to make contributions to a solo 401k through payroll. The key requirement is that you have W-2 wages from your business, but the actual mechanism of making contributions is flexible.
You have a few options for how to make the contributions:
- You can write a check directly from your personal or business checking account to the solo 401k account. This is probably the most common way for business owners to fund their solo 401k outside of payroll.
- You can transfer money from your personal or business savings/money market account via check, ACH, or wire transfer.
- You can arrange automatic periodic contributions to be pulled from your business or personal account to the solo 401k.
