Buying a home soon? How your Roth or pre-tax 401(k) choice, S-corp salary, and profit-sharing show up on a mortgage application.
Written for S-corp owners who pay themselves a W-2 salary into a Solo 401(k) and plan to apply for a mortgage in the next year or two.
The short answer
A pre-tax 401(k) deferral lowers the taxable wages on your W-2 and the income on your tax return. A Roth deferral doesn’t. If a lender reads your income from your tax return, Roth makes you look like you earn more, even though your business made exactly the same money.
That’s the total income on an S-corp owner’s 1040 with a Roth deferral compared with a pre-tax deferral, using the example below. Whether that difference matters depends on how your lender reads your W-2 and which tax years it uses.
What each choice shows
Example: an S-corp with $60,000 of profit before salary pays its owner a $16,000 W-2 salary, defers $14,776 into a Solo 401(k), and makes a $4,000 profit-sharing contribution.
| Pre-tax deferral | Roth deferral | |
|---|---|---|
| W-2 Box 1, taxable wages | $1,224 | $16,000 |
| W-2 Box 5, Medicare wages | $16,000 | $16,000 |
| K-1 income from the S-corp | $38,776 | $38,776 |
| Total income on your 1040 | $40,000 | $54,776 |
The K-1 income is the same either way. The S-corp deducts your salary, its share of FICA, and the profit-sharing contribution no matter how you defer. The only thing that changes is how much of your W-2 shows up as taxable wages.
Where a lender gets your income
to your return
averages the years
When you own 25% or more of the business you’re paid by, lenders usually treat you as self-employed. That generally means they qualify you from your personal and business tax returns, typically the last two years, rather than from recent pay stubs.
Box 1 or Box 5? Box 1 is your taxable wages, after pre-tax 401(k) deferrals. Box 5 is your Medicare wages, which still include those deferrals. A lender working from Box 5 or from gross pay may count your full salary either way. A lender working from the income on your 1040 will see less with a pre-tax deferral. Practices vary by lender and loan program, so ask.
How it can change your qualifying income
Using the same example, here’s the income a lender could see in each case.
Hypothetical example. S-corp owners who work in the business are expected to pay themselves a reasonable salary, so the no-salary case is shown only for comparison.
Which tax years will count?
This is often the biggest question, and it can make the rest of this article moot.
- Your 2026 return is filed before you applyThe lender will likely use 2025 and 2026. Your choices this year matter.
- Your 2026 return isn’t filed yetThe lender may use 2024 and 2025, plus a year-to-date profit and loss statement. This year’s choices may not affect qualifying at all.
- You close after the S-corp return is dueExpect the lender to want the newest returns, including the S-corp’s 1120-S.
Your other lever: timing the profit-sharing contribution
The employer contribution can wait
Unlike your paycheck deferral, the S-corp’s contribution doesn’t have to be made by December 31. If your qualifying income is tight and your 2026 return will be used, you can decide on it closer to the S-corp’s filing deadline, after you know where the mortgage stands. Just remember it’s deducted on the return for the year it’s made for, so decide before the S-corp files.
The trade-off with Roth
Higher income on your return, tax-free withdrawals in retirement, and your W-2 still supports your own Roth IRA. Costs more tax this year: about $4,360 on a $14,776 deferral at a 29.5% combined rate.
About $4,360 of tax saved this year, which is cash you could put toward closing costs. But your 1040 shows less income, and withdrawals in retirement are taxed.
Your game plan
1. Call the lender
Ask which years they’ll use and how they read your W-2 income.
2. Choose your deferral
Roth if your 1040 income matters to the lender; otherwise choose on tax merits.
3. Time the rest
Decide the profit-sharing contribution and filing dates with the mortgage timeline in mind.
Questions to ask your loan officer
- Will I be qualified as self-employed?
- Which tax years will you use?
- Do you read W-2 Box 1, Box 5, or gross pay?
- Do you need the S-corp’s 1120-S too?
- Will you want a year-to-date P&L?
- How do you treat K-1 income vs. distributions?
- Does a new salary this year need an explanation?
- When should my next return be filed?
Keep the big picture in view. Your salary still has to be reasonable for the work you do, and your retirement choices should make sense on their own. Use the mortgage to break a tie, not to drive the whole plan, and talk to your lender before making changes late in the year.
Buying a home this year?
We’ll review your S-corp salary, 401(k) choices, and filing timeline alongside your mortgage plans, and prepare the returns and P&L your lender will ask for.
Or call 516-261-2171
Sources
- IRS: About Form W-2, wage and tax statement
- Fannie Mae Selling Guide: self-employment income requirements
- IRS: Roth comparison chart
This article is for general educational purposes and is not individual tax, legal, or mortgage advice. Lender requirements vary by lender and loan program. The example is hypothetical and assumes $60,000 of S-corp profit before salary, a $16,000 W-2 salary, a $14,776 deferral, a $4,000 profit-sharing contribution, and a 29.5% combined tax rate.