Most S-Corp owners are surprised to learn that not all business income is treated equally when it comes to retirement savings. Only W-2 wages count toward contribution limits, while shareholder distributions are excluded — and that single rule can determine how much you can set aside each year. This affects which retirement plan may be the most practical or advantageous for your situation.
This guide walks through the main options for S-Corp owners and explains how each one interacts with your income, employee status, and long-term savings goals.
📌 Also read: 2025 Retirement Planning Checklist for the Self-Employed
Comparing Retirement Plans for S-Corp Owners
Choosing the right plan as an S-Corp owner typically comes down to your priorities: maximizing tax-advantaged savings, keeping administration manageable, or offering employee benefits without added complexity. Each option below plays a distinct role depending on whether you are a one-person operation or managing a growing team.
Here are the key contribution limits for 2025 to help frame expectations:
✅ Employee elective deferral limit: $23,500
✅ Overall defined contribution plan limit: $70,000
✅ SIMPLE IRA elective deferral limit: $16,500
✅ Catch-up contributions (age 50+): $7,500 for 401k plans; $3,500 for SIMPLE IRAs
📝 Note: Hitting maximum limits requires sufficient W-2 income. Contribution formulas for S-Corps are based on wages, not distributions.
When Is a Solo 401k a Good Fit?
Solo 401k plans are typically ideal for S-Corp owners with no employees. The plan structure allows you to contribute in two ways — as the employee and as the employer. This is what makes the Solo 401k capable of reaching the higher combined limit.
A Solo 401k may be worth considering if you are aiming to accelerate retirement savings while keeping full control over investment choices.
Here are some features of a Solo 401k that S-Corp owners may find useful:
✅ Combines employee deferrals with employer contributions
✅ Potential access to Roth deferrals and participant loans (if the plan document permits)
✅ Can reach the full $70,000 limit in 2025 with sufficient income
📝 Note: Once plan assets reach $250,000 at year-end, Form 5500-EZ must be filed with the IRS. This is a reporting requirement, not a tax.
When a Safe Harbor 401k Makes Sense
A safe harbor 401k is often a fit for S-Corp owners with employees who want to maintain higher deferrals without worrying about IRS nondiscrimination testing. The plan achieves this by requiring a specific employer contribution formula, which provides predictable results for both owners and employees.
Here are key points to consider about safe harbor plans:
✅ Eliminates the need for annual ADP/ACP testing
✅ Ensures contributions for employees are fully vested immediately (or after a short vesting period for QACA plans)
✅ Supports a consistent retirement benefit structure for the team
❌ Employer contributions are mandatory, which may increase overall plan costs
❌ Requires a mandatory employer match or nonelective contribution
📝 Note: Traditional 401k plans without safe harbor status remain subject to testing rules that may limit how much owners can defer.
📌 Also read: 401k Nondiscrimination Testing Explained
When to Consider a SEP or SIMPLE IRA
SEP and SIMPLE IRAs are generally seen as simpler alternatives to 401k plans. They may appeal to S-Corp owners who prefer minimal administrative requirements and are comfortable with lower contribution flexibility.
SEP IRA:
A SEP IRA operates entirely through employer contributions. No employee deferrals are allowed. Contributions are based on up to 25% of eligible W-2 compensation, capped at $70,000 for 2025.
✅ Minimal setup and administration
✅ Employer controls the full contribution amount
❌ Employees must receive the same percentage of compensation as the owner
SIMPLE IRA:
Designed for businesses with 100 or fewer employees, a SIMPLE IRA enables both employee deferrals and mandatory employer contributions.
✅ Elective deferrals up to $16,500 for 2025
✅ Catch-up contributions of $3,500 for individuals age 50+
✅ Lighter administrative burden than a traditional 401k
❌ Lower contribution limits compared to a Solo 401k or safe harbor 401k
📝 Note: SIMPLE IRAs have strict notification requirements and limited features. They are often viewed as a starter plan rather than a long-term strategy for high earners.
How to Choose a Retirement Plan for Your S-Corp
Making retirement plan decisions for an S-Corp often comes down to three key considerations: your eligible compensation, the contributions you want to make, and how much administration and compliance you are prepared to handle.
Here are some practical ways to stay within IRS limits, keep contributions aligned with your goals, and maintain compliance.
Step 1 — Confirm Your Eligible Compensation
For retirement plan purposes, “compensation” refers to the wages you report on your Form W-2 as an S-Corp employee. Shareholder distributions do not count as eligible income and cannot be used to calculate either elective deferrals or employer contributions.
Setting your W-2 pay requires balancing two objectives: meeting reasonable compensation standards and supporting your desired retirement contributions. The chosen payroll base becomes the foundation for all contribution calculations in the next steps.
📝 Note: This distinction is specifically highlighted by the IRS for S-Corp shareholder-employees and drives limits in all qualified plans.
Step 2 — Match Your Target Contribution to 2025 Limits
Once you determine eligible compensation, you can align your contribution goals with the 2025 limits.
How this translates to plan selection:
- Owner-only businesses often maximize savings with a Solo 401k by layering employer contributions on top of deferrals.
- S-Corps with employees may use a traditional or safe harbor 401k combined with profit-sharing to approach similar totals.
- SIMPLE and SEP IRAs generally support lower totals but require less administration.
📝 Note: IRS Publication 560 explains how compensation percentages and contribution caps interact when calculating employer contributions.
Step 3 — Balance Administration and Compliance
Compliance requirements vary depending on employee headcount and plan type.
- Traditional 401k plans must pass annual ADP/ACP nondiscrimination testing to ensure contributions for highly compensated owners don’t exceed those for rank-and-file employees.
- Safe harbor 401k plans bypass these tests by committing to required employer contributions and participant notices.
- Owner-only 401k plans generally avoid nondiscrimination testing entirely.
Other administrative considerations:
✅ Track asset thresholds for Form 5500-EZ filing (one-participant plans must file if end-of-year assets exceed $250,000)
✅ Maintain timely payroll deposits and contribution records
✅ Ensure participant notices and annual reporting are completed
📝 Note: Proper processes are critical to keeping the plan qualified as contributions grow and payroll scales.
Final Thoughts
The right retirement plan depends on how your S-Corp is structured and how much you want to save each year. If you operate without employees, a one-participant 401k may help you reach higher contribution limits because it allows both employee deferrals and employer contributions. If you have staff and want to contribute at the maximum level without worrying about testing, a safe harbor 401k may be a practical option, though it requires employer contributions.
SEP and SIMPLE IRAs may be suitable for owners who want fewer administrative responsibilities and are comfortable with lower contribution limits. The next step is to set your W-2 income at a level that supports your target savings amount and compare how each plan applies the 2025 limits.
Each plan serves a different goal. The most effective choice is the one that fits your compensation structure, team size, and long term savings needs.
📌 Also read: Best Places to Park Your Cash Without Losing to Inflation
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