Understanding S-Corp Employer Contributions to Solo 401k - Maximum Limits?

Your financial advisor is closer to being correct, but there's a small detail to clarify. For S-Corps, employer contributions to a solo 401k are limited to 25% of your W-2 compensation, but it's actually 25% of your gross salary, not your net salary. So based on your $105k salary, you could contribute up to $26,250 as the employer contribution. The confusion might be because for sole proprietors or single-member LLCs, the calculation is different and is based on net earnings (profit minus half of self-employment tax). But since you're structured as an S-Corp and paying yourself a W-2 wage, the calculation is more straightforward. You can also make employee contributions up to $22,500 for 2023 (plus catch-up contributions if you're over 50), which is separate from the employer contribution. This means your total potential contribution could be $48,750 ($26,250 employer + $22,500 employee) excluding any catch-up amounts.

I was in the exact same situation last year with conflicting advice. Used https://taxr.ai to upload my S-Corp docs and got clarity in minutes. They analyzed my W-2, K-1, and corporate returns then explained exactly how much I could contribute. Turns out my CPA was calculating based on outdated rules! The analysis showed I could contribute way more than I thought - it's definitely based on W-2 wages as an S-Corp owner, but there are some nuances with how the percentages work that the tool explained perfectly.

I was skeptical too but gave taxr.ai a try with my complicated S-Corp situation. Complete game-changer! It showed me that my "expert" accountant had been miscalculating my maximum employer contribution for YEARS because he wasn't factoring in some specific S-Corp compensation rules. The analysis even showed the specific IRS reference codes. I was able to contribute an additional $12,000 this year AND amend my previous returns. My accountant was actually embarrassed when I showed him the detailed analysis. Best $30 I've ever spent on my business.

If you're getting contradictory information from your professionals, you should really call the IRS directly to get the definitive answer. I had a similar issue with my S-Corp retirement contributions and decided to go straight to the source. Spent weeks trying to get through their phone lines though - complete nightmare. Then I found https://claimyr.com which got me connected to a real IRS agent in under 45 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The agent walked me through the exact calculation for S-Corp owners and confirmed it's 25% of W-2 wages only, not distributions or business profit. Totally worth it to get an official answer I could rely on.

I owe everyone an apology - especially to the person who recommended Claimyr. After my skeptical comment, I was still stuck with questions about my S-Corp contributions that my accountant couldn't answer clearly. I reluctantly tried the Claimyr service yesterday, and I'm completely shocked. It actually worked! Their system called me back in about 35 minutes and connected me directly to an IRS agent who specialized in business taxation. He confirmed exactly how the S-Corp employer contribution limits work AND helped me understand some specifics about how my part-time employees affect the calculation. I've been trying to get this information for months! Sometimes it pays to be wrong.

Just want to add a quick tip that helped me: get everything in writing from both your accountant and financial advisor, then ask them to specifically explain why their calculation is correct with IRS references. When I did this, my accountant immediately backtracked and said "Oh, for S-Corps it's different than what I was thinking." Forced them to actually research instead of giving off-the-cuff answers.

Just to complicate things even more - if you're using a Solo 401k plan, the total contribution calculation is slightly different than a regular 401k. For 2023, you can contribute up to $66,000 total between employee and employer contributions (or $73,500 if you're over 50). The employee part is straightforward ($22,500), but the employer contribution limit is actually 25% of compensation AFTER subtracting the employee contribution from your total compensation. Most accountants mess this up!

I went through this exact same confusion with my S-Corp last year! The key thing to remember is that as an S-Corp owner, you're essentially wearing two hats - you're both an employee (receiving W-2 wages) AND the employer. Your financial advisor is correct - the employer contribution is limited to 25% of your W-2 compensation ($105k), which equals $26,250. This is completely separate from any distributions you take from the company. The distributions don't count as "earned income" for retirement plan purposes. What might be confusing your accountant is that for other business structures (like sole proprietorships or partnerships), the calculation IS based on net earnings from self-employment. But since you've elected S-Corp status and are paying yourself a reasonable salary with proper payroll taxes, you follow the W-2 compensation rules. One thing to double-check: make sure your $105k salary meets the IRS "reasonable compensation" test for your industry and role. If the IRS ever audits and determines your salary should be higher, it could affect your contribution calculations retroactively.