S-Corp vs. Sole Proprietor Solo 401(k): How Salary Changes Your Limit

Your S-corp salary, not your profit, sets your Solo 401(k) employer contribution, which is 25% of your W-2 wages. A sole proprietor uses net earnings from self-employment instead, usually a much larger base. So the same move that saves payroll tax in an S-corp, paying yourself a lower salary, also lowers your retirement ceiling. At a $150,000 profit with a $75,000 salary, a sole proprietor can put away $52,381 while the S-corp owner is capped at $43,250. The structure that wins on FICA can lose on retirement.

The Two Pieces of a Solo 401(k)

A Solo 401(k) lets you contribute as both the employee and the employer. Those are two separate buckets, and they have different rules.

The first is the employee elective deferral. In 2026 you can defer up to $24,500 of your compensation into the plan. This piece is the same dollar amount whether you run a sole proprietorship or an S-corp, as long as you have enough earned income to cover it. It is your money, moved from your paycheck into the plan.

The second is the employer contribution. This is where the structures split apart. The employer piece is calculated from a base, and that base depends entirely on how the IRS treats your earnings. For an S-corp, the base is your W-2 salary. For a sole proprietor, the base is your net earnings from self-employment.

The 25%-of-W-2 Rule for the S-Corp

For an S-corp shareholder-employee, the employer contribution is capped at 25% of your W-2 wages. That is the whole calculation. Pay yourself $75,000 in salary, and the most the company can contribute on the employer side is 25% of $75,000, which is $18,750.

This is clean and easy to compute, but it has a hard edge. The employer contribution is tied to salary, and nothing else. Your distributions do not count. Your total profit does not count. Only the wages on your W-2 move the number.

The Net-Earnings Method for the Sole Proprietor

A sole proprietor does not pay themselves a W-2 salary. Instead, the employer contribution comes from net earnings from self-employment, which is your business profit reduced by half of your self-employment tax and by the contribution itself. The IRS lays this out in Publication 560, and the effective rate works out to roughly 20% of that adjusted profit rather than a flat 25%.

The base, though, is much larger. A sole proprietor with $150,000 of profit is computing the employer contribution against something close to that full $150,000, not against a $75,000 salary you chose to keep low. That difference in base is the entire story.

How a Low Salary Throttles the Employer Piece

Here is the trap. In an S-corp, the usual play is to keep your salary modest and take the rest as distributions, because distributions avoid payroll tax. That works for FICA. But your Solo 401(k) employer contribution is pinned to that same modest salary.

Set your S-corp salary at $75,000 to save on payroll tax, and you have also capped your employer contribution at $18,750. The profit you took as distributions does nothing for your retirement contribution. A sole proprietor at the same profit never made that tradeoff, so their base stays high and their employer contribution runs higher.

Remember that the $24,500 deferral is shared across all of your 401(k)-type plans. If you have a day job with its own 401(k), or a second business, the deferrals combine. You do not get a fresh $24,500 per plan.

Worked Example: Same Profit, Different Ceilings

Both owners below are single, with $75,000 of salary and no other wages. The only thing that changes is the structure.

At a $150,000 profit, the sole proprietor puts away $52,381 against the S-corp owner’s $43,250, a gap of more than $9,000. The difference is the employer piece: $27,881 from the larger net-earnings base versus $18,750 from the $75,000 salary.

Now push the profit higher.

At $408,000 of profit, the sole proprietor reaches the $72,000 overall §415 defined-contribution limit, the maximum any Solo 401(k) participant can hit in 2026. The S-corp owner, still on the same $75,000 salary, stays at $43,250. The S-corp owner could raise their salary to lift the employer piece, but every dollar of added salary also adds FICA.

Open the S-Corp Tax Calculator to see how your salary changes your retirement ceiling.

The Tradeoff You Are Actually Making

This is not a reason to abandon the S-corp. The payroll-tax savings on distributions are real, and for many owners they outweigh a smaller retirement contribution. The point is that the two are linked. You cannot set the lowest defensible salary for FICA purposes and also expect the biggest possible Solo 401(k) employer contribution. Those goals pull in opposite directions.

If maxing retirement matters more than shaving payroll tax, a higher S-corp salary, or staying a sole proprietor, may serve you better. Run your own numbers before you lock in a salary, because the salary you pick does double duty: it sets your payroll tax and your retirement ceiling at the same time.

Not sure which structure leaves you with more? Open the S-Corp Tax Calculator and compare both at your real profit.

Frequently Asked Questions

Does my S-corp profit affect my Solo 401(k) employer contribution?

No. Only your W-2 salary does. The employer contribution is capped at 25% of your wages, so distributions and total profit have no effect on that piece.

Can I contribute more than $24,500 as the employee?

Not as the elective deferral. The $24,500 limit in 2026 is shared across all of your 401(k)-type plans, including a 401(k) at a separate job. The employer contribution is a separate bucket on top of that deferral.

Why can a sole proprietor contribute more than an S-corp owner at the same profit?

The sole proprietor’s employer contribution is based on net earnings from self-employment, a much larger base than the modest salary most S-corp owners choose. The S-corp’s 25%-of-salary cap limits the employer piece whenever the salary is set low to save payroll tax.

Related guides

• When does an S-corp make sense in 2026? The break-even
• S-corp reasonable salary: the IRS rules for 2026
• How S-corp salary affects QBI in 2026

Sources

• IRS, Publication 560
• IRS, One-Participant 401(k) Plans

Last reviewed: June 21, 2026.