February 1, 2023 | By George Blower
Please check out this good question from our Daily Live Zoom call. Subscribe to ourYouTube Channelto get notifications of our Daily FAQs.
Self-employed 401k FAQ: Can I make Solo 401k contributions from my S-corp K-1 income?
For an S corporation, if the earnings show $40,000 on schedule K. Please note that this is not W-2 income but is income reported on K-1. Can I open a solo 401(k) based on this K-1 earning if I don’t pay W-2 from my S-corporation?
RESPONSE:
Great question as many of our Solo 401k clients operate their self-employed business via an S-corporation.
It is important to understand that a solo 401(k) is for a self-employed individual with no full-time non-owner/non-spouse w-2 employees working for any business owned by that person or spouse if any.
As a self-employed individual, the person is both the owner and the employee.
The purpose of any type of 401(k) including the solo 401(k) is for employees to save for retirement and not for owners to save for retirement.
Therefore, one may not use K-1 earnings as a basis to open a Solo 401k and make contributions. Instead, such person would need to receive earned self-employment income (e.g. w-2 wages from a self-employed business taxed as an S-corporation).
Learn more: CORPORATION: Calculating My Solo 401k contributions for a Corporation
