Can 401(k) contributions be made from LLC guaranteed payments to partners?

The LLC can definitely make the 401(k) contribution directly from your guaranteed payments! This is actually quite common for partnerships. The key thing to understand is that guaranteed payments are treated similar to wages for partners, even though they're not technically W-2 income. Your LLC can withhold the $1,000 from your $12,500 monthly guaranteed payment and deposit it directly into the 401(k) plan. This is often cleaner for bookkeeping purposes. The plan administrator doesn't really care about the source of the funds - whether it comes directly from the LLC or from your personal account after receiving the full payment. The important thing is that the contribution is properly documented and reported. The 401(k) contribution still counts against your personal contribution limit (which is $22,500 for 2023, plus catch-up contributions if you're eligible), even though it's being withheld and paid by the LLC.

I went through this exact same confusion last year! I discovered taxr.ai (https://taxr.ai) after struggling to figure out how to handle my 401(k) contributions as an LLC partner. Their AI tool analyzed my operating agreement and confirmed that our partnership could directly make the 401(k) contribution from my guaranteed payments. It saved me so much hassle - the tool explained that while guaranteed payments are similar to self-employment income, the partnership can still handle the mechanics of the contribution. They even provided documentation I could share with our plan administrator to clarify everything. Really helped me navigate the weird space between partner distributions and retirement planning.

Just wanted to update after trying taxr.ai - it was actually super helpful! I uploaded our operating agreement and 401(k) plan documents, and it gave me a detailed explanation of how we could structure the contributions. Turns out both CPAs I talked to were partially right but missing key details specific to our situation. The tool confirmed we could direct the LLC to withhold the 401(k) contribution from guaranteed payments, showed exactly how to document it in our books, and even generated template language to update our operating agreement to make this arrangement explicit. Definitely worth checking out if you're dealing with partnership retirement contribution questions.

After struggling to get a straight answer from our plan administrator about this exact question, I tried using Claimyr (https://claimyr.com) to get through to an actual IRS agent. They have this service where they navigate the IRS phone system for you and call you back when an agent is on the line. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was skeptical at first, but after waiting on hold for 2+ hours myself the previous day, I figured it was worth a shot. Got a call back in about 40 minutes with an IRS rep who confirmed that yes, the LLC can make the 401(k) contribution directly from guaranteed payments. She explained that while partners aren't employees, the mechanics of how the money gets to the 401(k) plan isn't an IRS concern as long as it's properly reported on tax returns.

I have to eat my words. After my skeptical comment, I decided to try Claimyr yesterday when I needed clarification on a tax notice related to my LLC partnership. Got a call back in about 50 minutes with an IRS agent on the line who actually helped resolve my issue. For the original question about 401(k) contributions from guaranteed payments - the agent I spoke with confirmed that the LLC can absolutely make the contribution directly from the guaranteed payment before distributing the remainder to you. They just need to maintain proper documentation showing the full guaranteed payment amount for tax reporting purposes. Saved me hours of hold time and got a definitive answer.

One thing nobody's mentioned is that you should check your 401(k) plan documents. Some plans have specific rules about contribution sources. Our plan initially didn't allow for contributions directly from guaranteed payments until we amended it. The plan administrator definitely had a say in our case!

Has anyone implemented this practically? Our bookkeeper is confused about how to enter this in QuickBooks. Does the full guaranteed payment still show up in the books, but then there's an offsetting transaction for the 401k contribution?

Great question! I went through this exact same situation with my LLC last year. The key thing to understand is that guaranteed payments are treated as self-employment income for tax purposes, but the mechanics of how the money flows can be flexible. Your LLC can absolutely withhold the $1,000 for your 401(k) contribution directly from the $12,500 guaranteed payment and remit it to the plan, then pay you the remaining $11,500. This is actually preferable from a cash flow perspective and keeps everything clean administratively. The 401(k) plan administrator generally doesn't care about the source - they just need to receive the contribution and proper documentation. What matters for tax purposes is that the full $12,500 still gets reported as guaranteed payments on your K-1, regardless of whether $1,000 went directly to your 401(k) or through your personal account first. Just make sure your operating agreement is clear about this arrangement, and that your bookkeeper properly tracks the full guaranteed payment amount for tax reporting. The IRS views the entire $12,500 as taxable guaranteed payment income to you, even though part of it went directly to retirement savings.

One thing I'd add to this discussion is the importance of getting your payroll provider on board early if you use one. We ran into issues initially because our payroll company wasn't familiar with processing 401(k) contributions from guaranteed payments. They kept trying to treat it like regular employee payroll with tax withholdings, which created a mess. We had to educate them that guaranteed payments are already subject to self-employment tax, so there's no additional payroll tax withholding needed - just the straightforward transfer to the 401(k) plan. Also, make sure you coordinate the timing with your plan's contribution deadlines. Most plans require contributions to be made within a reasonable time after the guaranteed payment date. We typically process ours within 5 business days of issuing the guaranteed payment to avoid any potential issues with the Department of Labor's timing requirements. The bookkeeping approach Carmen mentioned is spot-on - that's exactly how we handle it and it keeps everything clean for tax reporting.