I’m a shareholder and an employee of an S corporation. Can I contribute to the company’s 401(k) plan or establish a self-employed retirement plan based on my S corporation distributions?
No. Contributions to a retirement plan can only be made from compensation, which, in the case of a self-employed individual, is earned income. Distributions you receive as a shareholder of an S corporation do not constitute earned income for retirement plan purposes (see IRC Sections
401(k) Plan Contributions
If you are a common-law employee of the S corporation:
- you can make salary deferral contributions to the 401(k) plan based on your Form W-2 compensation; and
- your employer can make matching or nonelective contributions to the plan based on your Form W-2 compensation as a common-law employee.
If you’ve made contributions to a 401(k) plan based on a shareholder’s S corporation’s distributions, find out how you can correct this mistake.
Contributions to a Self-Employed Plan
You can’t make contributions to a self-employed retirement plan from your S corporation distributions. Although, as an S corporation shareholder, you receive distributions similar to distributions that a partner receives from a partnership, your shareholder distributions aren’t earned income for retirement plan purposes (see IRC Section 1402(a)(2)). Therefore, you also can’t establish a self-employed retirement plan for yourself solely based on being an S corporation shareholder.
- Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
- Independent Contractor (Self-Employed) or Employee?
- S Corporation Employees, Shareholders and Corporate Officers