Pay yourself a $16,000 W-2 salary from your S-corp and move nearly all of it, plus a business contribution, into a Solo 401(k).
Written for owner-only S-corps. Follow the eight steps to set up the plan, run payroll, and see exactly what it does to your taxes.
The idea in one paragraph
As an S-corp owner who works in the business, you’re expected to pay yourself a reasonable W-2 salary. That salary carries FICA, but it also lets you contribute to a Solo 401(k) twice: once as the employee through a payroll deferral, and again as the employer through a profit-sharing contribution. Done right, almost the whole paycheck lands in your retirement account instead of your checking account.
That’s $14,776 you defer from your paycheck (everything left after FICA) plus a $4,000 employer contribution from the S-corp. Both are well under the 2026 limits of $24,500 for deferrals and $72,000 in total.
Where the money goes
FICA withheld
within 7 days
The paycheck math
You can’t defer 100% of your salary. Your share of FICA has to be withheld from the paycheck itself, and a 401(k) deferral doesn’t reduce FICA. Everything after that can go to the plan.
| Amount | |
|---|---|
| Gross W-2 salary | $16,000 |
| Your FICA withheld (7.65%) | −$1,224 |
| Your 401(k) deferral | $14,776 |
| Income tax withheld (pre-tax deferral) | about $0 |
| Net paycheck | about $0 |
| Employer profit-sharing (25% of $16,000) | +$4,000 |
| Total into your 401(k) | $18,776 |
| S-corp’s matching FICA (deductible) | $1,224 |
What it does to your taxes
Here’s the comparison against taking the same $60,000 of S-corp profit with no salary, for an owner in the 22% federal bracket paying about 7.5% in Maryland state and county tax, with a pre-tax deferral.
| No salary | $16,000 salary + 401(k) | |
|---|---|---|
| S-corp deductions (salary, its FICA, profit-sharing) | $0 | $21,224 |
| K-1 income | $60,000 | $38,776 |
| W-2 Box 1 (after the deferral) | $0 | $1,224 |
| Total income | $60,000 | $40,000 |
Your income drops by $20,000, not by the full $21,224 the S-corp deducts. The salary comes back to you as W-2 wages, and only the deferred part leaves your income.
| Tax effect this year | Amount |
|---|---|
| Federal: ($20,000 − $4,245 of lost QBI deduction) × 22% | $3,466 saved |
| Maryland: $20,000 × 7.5% (no QBI deduction) | $1,500 saved |
| Total income tax saved | $4,966 |
| FICA, both halves | −$2,448 |
| Net tax benefit | about $2,518 |
Why the QBI deduction shrinks. If your business qualifies for the 20% qualified business income deduction, it’s figured on your K-1 income. Every dollar the S-corp deducts lowers it. Here, $21,224 less K-1 income costs about $4,245 of QBI deduction, which is why the federal savings aren’t a straight 22% of $20,000.
With a Roth deferral instead, your income only drops by the $5,224 of employer-side deductions, and most of that is offset by the lost QBI deduction. You’d be about $1,840 behind this year after FICA. In return, the $14,776 and its growth come out tax-free in retirement.
The whole process at a glance
1. Set up
Confirm you qualify, open the plan through the S-corp, and sign your deferral election.
2. Pay yourself
Set up the payroll deduction, run payroll, and deposit everything on time.
3. Finish
Add the employer contribution and check your W-2.
Your timeline
- NowOpen the Solo 401(k) and sign your deferral election (steps 1–3)
- Before December 31Run payroll and deposit the deferral within 7 business days (steps 4–6)
- January 31Issue your W-2 and file Forms W-3, 941, and 940 (step 8)
- S-corp return due dateMake the $4,000 employer contribution, March 15 or later with an extension (step 7)
The eight steps
Confirm a Solo 401(k) fits
- Your S-corp has no employees other than you and your spouse
- The S-corp has its own EIN and can run payroll
- You’re paying, or ready to pay, yourself a W-2 salary
Why this matters
A Solo 401(k) is only for owner-only businesses. If you have other employees, you’d need a regular 401(k) or a SEP-IRA, which have different rules.
Open the plan in the S-corp’s name
- Choose a provider and select a Solo 401(k), sometimes called an Individual 401(k)
- Adopt the plan document using the S-corp’s name and EIN
- Open the plan account and choose your investments, such as a target-date fund
Why this matters
The S-corp is the plan sponsor, not you personally. The plan must exist before any payroll you want to defer from.
What to check before you pick a provider
- Roth deferrals: not every Solo 401(k) offers them
- Roth employer contributions: allowed under SECURE 2.0, but only if the plan document includes them
- Loans: a backup source of cash some plans allow
- Low-cost funds: no plan fees, and access to index or target-date funds
Sign your deferral election
- Put it in writing: defer all pay remaining after FICA
- Choose pre-tax, Roth, or a split
- Date it before the payroll it applies to
Why this matters
Deferrals can’t be made after wages are paid. A signed, dated election shows the money was set aside correctly.
Pre-tax, Roth, or a mix?
Lowers this year’s taxable income. You pay tax when you withdraw in retirement. Best when your bracket is high now.
No deduction now, but the money and its growth come out tax-free. Best when your bracket is low now or likely higher later.
Add the 401(k) to your payroll
- Create a 401(k) deduction item: pre-tax (code D) or Roth (code AA)
- Set the deduction so net pay comes out to about $0
- Turn off federal and state income tax withholding only if your deferral is pre-tax and taxable wages are minimal
Why this matters
Most payroll errors happen here. If the deduction is coded wrong, your W-2 and your tax savings will both be wrong.
First payroll for this S-corp?
You’ll need federal tax deposits and Form 941, a state withholding account, and FUTA. Check your state’s unemployment insurance rules for corporate officers, which vary. Payroll software like QuickBooks Payroll handles the filings once the 401(k) deduction item is set up.
Run payroll before December 31
- Pay the full $16,000, in one paycheck or several
- FICA of $1,224 comes out of your check, and the S-corp pays a matching $1,224
- The remaining $14,776 goes to the 401(k)
Why this matters
Wages count in the year they’re paid. A paycheck dated in January counts toward next year’s limits and taxes.
Deposit the money on time
- Send the $14,776 deferral to the 401(k) account
- Make the payroll tax deposit for the $2,448 of FICA
- Keep the confirmation for each deposit
Why this matters
Deferrals are your money held by the business. Small plans have a 7-business-day safe harbor for getting them into the plan.
Two deposits, two deadlines
Make the employer contribution
- The S-corp contributes up to 25% of your W-2 wages: $4,000
- Transfer it from the business account to the 401(k)
- Deduct it on the S-corp’s Form 1120-S
Why this matters
This is the part that adds money without any FICA. It can be made after year-end, up to the S-corp’s tax return due date, including extensions.
How the employer contribution is figured
It doesn’t run through payroll, carries no FICA, and doesn’t appear on your W-2. The S-corp deducts it on Form 1120-S.
Check your W-2 and year-end filings
- Confirm the W-2 shows the deferral in Box 12 and the retirement-plan box checked
- File Forms W-2, W-3, 941, and 940 on time
- File Form 5500-EZ once plan assets go over $250,000
Why this matters
A wrong Box 1 or Box 12 shows up as a mismatch on your personal return. Checking the W-2 before you file saves an amended return.
Don’t forget your Roth IRA
IRA contributions are limited to your compensation, measured by W-2 Box 1. With a pre-tax deferral, your Box 1 drops to $1,224, which would cap your own IRA contribution at that amount. If you’re married filing jointly, the spousal IRA rule lets your spouse’s wages count, so you can still contribute the full amount if their pay covers both IRAs.
Two things to keep in mind. Your salary has to be reasonable for the work you do in the business. Don’t set it based only on what you want to contribute. And 401(k) money is meant to stay put until age 59½. Early withdrawals generally bring income tax plus a 10% penalty, so fund your emergency savings and near-term goals first.
Is this worth it compared with leaving the money in checking?
About $2,500 saved this year, $18,776 invested for the long term and generally shielded from creditors, plus Social Security credits from the salary.
Taxed now at your full rate, earns close to nothing, and loses buying power to inflation every year. The only advantage is instant access.
Before you finish: quick checklist
- No employees besides you and your spouse
- Plan adopted under the S-corp’s EIN
- Deferral election signed and dated
- Payroll deduction coded pre-tax or Roth
- Payroll paid before December 31
- Deferral deposited within 7 business days
- Employer contribution by the return due date
- W-2 Box 1, Box 12, and Box 13 checked
Want your own numbers?
We’ll set a reasonable salary, run the payroll and QBI math for your income and state, and help you choose pre-tax, Roth, or a mix.
Or call 516-261-2171
Sources
- IRS: One-participant 401(k) plans
- IRS: Qualified business income deduction
- 2026 plan contribution limits (IRS Notice 2025-67)
This guide is for general educational purposes and is not individual investment, tax, or legal advice. The example assumes an owner-only S-corp with $60,000 of profit before salary, a 22% federal bracket, about 7.5% Maryland state and county tax, eligibility for the full QBI deduction, and a pre-tax deferral. Your results depend on your income, filing status, state, and plan. Limits shown are for 2026.