S-Corp Retirement
Solo 401(k) for S-Corp Owners: How Your Salary Caps Your 2026 Contribution
The salary you set on your S-Corp does two jobs at once. It controls your self-employment tax savings, and it sets the ceiling on your Solo 401(k). Those two goals pull in opposite directions, and most owners only think about the first one until December.
I get this question every December from S-Corp owners who set a low salary to cut payroll tax and then discover, too late, that the same low salary just capped how much they can put into their retirement plan. Picture a marketing consultant whose S-Corp nets $250,000 after expenses. She pays herself a $90,000 salary and takes the rest as distributions. She wants to put as much as she can into a Solo 401(k) for 2026. Her accountant tells her the most she can contribute is $47,000, not the $72,000 she read about online. The gap is entirely a function of her salary. The owner here is theoretical, not an actual EntityIQ client.
The 2026 contribution limits
A Solo 401(k), also called an individual 401(k), is a 401(k) plan for a business with no employees other than the owner and a spouse. For 2026 the IRS set the elective deferral limit under IRC §402(g) at $24,500, the age 50 catch-up under §414(v) at $8,000, and the SECURE 2.0 enhanced catch-up for ages 60 through 63 at $11,250. The total annual additions limit under IRC §415(c) is $72,000, not counting catch-up. So a 45-year-old can put in at most $72,000, a 55-year-old at most $80,000, and a 61-year-old at most $83,250. Those are ceilings, not entitlements. Whether you can reach them depends on your wages. The IRS published these numbers in its 2026 limits release.
A Solo 401(k) has two parts
Your contribution comes from two buckets. The first is the employee elective deferral, the $24,500 you defer from your own W-2 paycheck. The second is the employer profit-sharing contribution, which the S-Corp makes on your behalf. For an S-Corp owner, the employer contribution is capped at 25% of your W-2 wages, under IRC §404(a)(3). The two together cannot exceed $72,000 in 2026, or 100% of your compensation if that is lower. The compensation that feeds the 25% calculation is your gross salary, before the deferral reduces Box 1.
Your salary is the ceiling
Here is the part people miss. The employer 25% is 25% of your salary, so a low salary caps the employer piece hard. The table below shows the most a Solo 401(k) participant under 50 can contribute at four salary levels in 2026.
| W-2 salary | Employee deferral | Employer 25% | Total contribution |
|---|---|---|---|
| $60,000 | $24,500 | $15,000 | $39,500 |
| $100,000 | $24,500 | $25,000 | $49,500 |
| $150,000 | $24,500 | $37,500 | $62,000 |
| $190,000 | $24,500 | $47,500 | $72,000 |
Participant under age 50. Figures use the 2026 limits and assume the salary is the owner's only earned income.
To reach the full $72,000 you need a W-2 salary of at least $190,000, because 25% of $190,000 is the $47,500 of employer money that, added to a $24,500 deferral, hits the cap. Our theoretical consultant at $90,000 can defer $24,500 and add $22,500 of employer money, which is $47,000 total. That is the $47,000 her accountant quoted.
This collides with your reasonable-salary strategy
An S-Corp election saves payroll tax by keeping your salary low, because only the salary is subject to FICA while distributions are not. A Solo 401(k) does the opposite. The more you want to contribute, the higher the salary you need. The 2026 Social Security wage base is $184,500, so moving from a $100,000 salary to $190,000 to unlock the full contribution would add roughly $13,000 in combined payroll tax for that year. You have to decide whether the extra tax-deferred room is worth the extra tax. Often it is not, and a $49,500 contribution at a $100,000 salary is the better balance. Remember that whatever salary you pick still has to clear the reasonable compensation standard, so you cannot simply name the number that maximizes your plan.
Deferrals still pay payroll tax
A common misread is that the deferral escapes payroll tax. It does not. Elective deferrals to a 401(k) reduce your income tax because they come out of Box 1 wages, but they are still subject to Social Security and Medicare tax under IRC §3121(v)(1)(A). Only the employer profit-sharing contribution avoids FICA entirely, because it is not wages. So the deferral saves income tax, not payroll tax, and the employer contribution saves both. That is one more reason the 25% employer piece is the part worth protecting when you set your salary.
Deadlines and Form 5500-EZ
For an S-Corp, your elective deferrals must run through payroll, so you have to set up the plan and elect your deferral by December 31, 2026 to defer from that year's wages. The employer profit-sharing contribution can wait until the due date of the S-Corp return, including extensions, under IRC §404(a)(6). Once total plan assets cross $250,000, you must file Form 5500-EZ each year. The annual additions also sit under the §401(a)(17) compensation cap, which the IRS set at $360,000 for 2026, though that ceiling rarely binds a one-person plan before the $72,000 limit does.
Before you lock in a low salary purely to shave payroll tax, run the retirement math too. The right salary is the one that clears the reasonable compensation bar, captures the self-employment tax savings, and still funds the retirement contribution you actually want. The EntityIQ S-Corp tax calculator models the payroll-tax side of that decision, and our guides on reasonable compensation and the Social Security wage base cover the rest.
This article is educational and is not legal or tax advice. The numbers above are 2026 figures, and the owner is theoretical. Please consult a qualified CPA or enrolled agent before setting your salary or funding a retirement plan.