Guide · 2026 limits
Retirement for an S-corp owner: your salary sets the limit
A solo 401(k) or a SEP-IRA lets a one-owner business save a large share of its income for retirement. After an S election there is a catch: the contribution limits are based on your salary alone. Distributions don’t count. Here is how that works, with the 2026 limits.
In short
- For an S-corp owner, only your W-2 salary counts toward retirement contributions. S-corporation income passed through to you doesn’t.
- A SEP-IRA allows up to 25% of your salary, capped at $72,000 for 2026.
- A solo 401(k) adds your own deferral of up to $24,500 for 2026 on top of the 25%, within the same $72,000 limit.
- A lower salary saves payroll tax but also lowers how much you can put away.
Why the S election changes your retirement limits
As a sole proprietor, your retirement plan limits are based on your net earnings from self-employment: your business profit, after the deductible part of self-employment tax and the contributions made for you. Publication 560 has the worksheet.
After the S election, you are an employee of your corporation, and net earnings from self-employment don’t include income passed through to shareholders of S corporations. So your contributions are figured on your W-2 salary. The profit you take as distributions doesn’t count.
The 2026 limits
| 2026 | |
|---|---|
| Your own elective deferral (401(k)) | $24,500 |
| Catch-up deferral, age 50 or older | $8,000 |
| Catch-up deferral, ages 60 to 63 | $11,250 |
| Total contribution limit (401(k) or SEP) | $72,000 |
| Most salary that counts | $360,000 |
The employer part, which your corporation contributes, can be up to 25% of your compensation. A SEP-IRA has only the employer part. A solo 401(k) has both: your deferral and the employer part, within the total limit. Your deferral limit is per person, not per plan, so a 401(k) at another job counts against it.
What your salary allows
Here is the most you could contribute at a few salaries in 2026, if you are under 50 and have no other 401(k):
| Your salary | SEP-IRA, up to | Solo 401(k), up to |
|---|---|---|
| $40,000 | $10,000 | $34,500 |
| $60,000 | $15,000 | $39,500 |
| $90,000 | $22,500 | $47,000 |
| $120,000 | $30,000 | $54,500 |
The solo 401(k) allows far more at the same salary, because of your own deferral. A SEP-IRA reaches the $72,000 limit only at a high salary.
The trade-off with your salary
The S election saves payroll tax by keeping your salary lower than your profit. A lower salary also lowers your retirement room, especially with a SEP-IRA. If you plan to put away a lot, the salary that saves the most payroll tax may not be the one that fits your plan. And the salary must still be reasonable for your work. How to pay yourself shows what each salary does to the saving.
Sources
- IRS, COLA increases for dollar limitations on benefits and contributions (page last reviewed 24-Aug-2026)
- IRS Publication 560, Retirement Plans for Small Business
- IRS, One-participant 401(k) plans (page last reviewed 09-Apr-2026)
- Form W-2 (2026)
Every figure was read on an official page and checked a second time. Checked October 24, 2026. How we check facts.
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