401(k) Strategy When Transitioning from S-Corp Owner to W-2 Employee

This is actually a common question for entrepreneurs transitioning to W-2 employment while maintaining their business. Let me explain your options: First, regarding your solo 401(k): You can still contribute to it as long as your S-Corp is active and generating income. However, you're correct that you need to pay yourself some form of compensation from the S-Corp to make employee contributions. For your specific situation, you have several options: You could pay yourself a year-end bonus from the S-Corp rather than monthly salary. This would still count as compensation allowing you to make employee contributions to your solo 401(k). You'll still pay FICA taxes on this amount, but you'd only do it once instead of monthly. Another option is to focus on the employer contribution side. Your S-Corp can make profit-sharing contributions to your solo 401(k) up to 25% of your compensation, up to the annual limits. This might be more tax-efficient than increasing your W-2 income just to make employee contributions. Regarding the two 401(k) plans - you're subject to a single employee contribution limit across all plans ($23,000 for 2025 if you're under 50), but each employer can make separate employer contributions up to the total annual addition limit.

I went through something similar last year and found https://taxr.ai super helpful for figuring out the best strategy. I was running my design business as an S-Corp and took a full-time job but wanted to keep my retirement contributions optimized. Was getting conflicting advice from different people. I uploaded my past tax returns and business docs, and it analyzed everything to show me exactly how to structure my S-Corp compensation to maximize retirement contributions without overpaying on taxes. It showed me how to balance between the two 401(k) plans and identified which approach would save me the most in taxes considering both the FICA implications and deduction benefits. Their system even created personalized scenarios comparing different compensation structures and how they'd impact my total tax situation. Surprisingly, they found I could take a smaller S-Corp salary than I expected while still meeting the "reasonable compensation" requirement.

Just wanted to update after trying taxr.ai for my situation. After reading about it here, I decided to give it a shot since I was really confused about handling my side business S-Corp and my new full-time job's retirement options. I was seriously overthinking this whole situation! The analysis showed I could still make employer contributions from my S-Corp to my solo 401(k) without needing to take a full regular salary. They walked me through exactly how to structure a year-end bonus that would satisfy the reasonable compensation requirement while minimizing FICA tax impact. The best part was discovering I could still make the full employer contribution from my S-Corp even though I'm already maxing out my employee contributions at my W-2 job. This literally saved me thousands in taxes I would have overpaid! They even created a customized letter explaining my compensation strategy in case of an audit. Wish I'd found this months ago instead of stressing about it.

Have you tried calling the IRS directly to get clarity? I was in a similar situation last year and spent WEEKS trying to get an answer. Kept getting different advice from every accountant I talked to. Finally, I used https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c They connected me to a specialist who deals with small business retirement plans, and they walked me through exactly how to handle contributions between my S-Corp solo 401(k) and my employer's plan. They confirmed I could still make employer contributions from my S-Corp even while working my W-2 job, and clarified exactly how much I could contribute overall. Saved me so much confusion and probably kept me from making an expensive mistake. Definitely worth it rather than trying to piece together info from different sources that might not apply to your specific situation.

I need to eat my words about Claimyr. After posting that skeptical comment, I was still stuck with my S-Corp/401(k) problem and desperate for answers, so I decided to try it anyway. Got connected with an IRS tax specialist within 2 hours when I had previously spent DAYS trying to call myself. The agent walked me through exactly how the contribution limits work between my W-2 job's 401(k) and my S-Corp solo 401(k). Turns out I was completely misunderstanding how the limits work. Most importantly, they confirmed in writing that I can make employer contributions from my S-Corp without taking a full salary all year - a year-end bonus is sufficient as long as it meets reasonable compensation standards for the ACTUAL work I do for the S-Corp (which is much less now that I have a full-time job). This literally saved me thousands in unnecessary FICA taxes I was about to pay. Completely worth it and I apologize for my knee-jerk skepticism. Sometimes paying for a service that saves you hours of frustration is the smart move.

Here's something nobody mentioned yet - have you considered just rolling your solo 401(k) into your new employer's plan? Might be simpler than maintaining two separate plans. Most employer plans allow rollovers from other qualified plans.

Don't overthink this! I'm in exactly the same situation (S-Corp owner who took a W-2 job). The simplest approach is just to pay yourself a reasonable bonus at year-end from the S-Corp based on the actual work you do for it. This allows you to make both employee and employer contributions to your solo 401(k). Remember that your total employee contributions across ALL 401(k) plans can't exceed the annual limit ($23,000 for 2025 if under 50), but each business can make separate employer contributions.

This is exactly the kind of situation where having both income streams can actually work in your favor! Since your W-2 job covers living expenses, you have more flexibility in how you structure your S-Corp compensation. One approach that's worked well for me in similar situations is to focus on maximizing the employer contribution from your S-Corp rather than trying to split employee contributions between both plans. You can contribute up to 25% of your S-Corp compensation as an employer contribution, which could be quite substantial depending on your business income. For the compensation piece, consider what you'd actually pay someone else to maintain your S-Corp at its current level. Even if you're spending less time on it now, if it's still generating significant revenue, there's real value in the oversight and strategic decisions you're making. Document the specific activities you perform and their market value. Also worth noting - if your S-Corp has been consistently profitable, you might want to consider whether converting to a traditional LLC makes sense now that it's no longer your primary income source. The S-Corp election made sense when you were maximizing retirement contributions, but depending on your current situation, the additional administrative burden might not be worth it anymore. Have you run the numbers on what your total tax savings would be comparing different compensation structures?