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As an owner of a sole proprietorship, partnership, limited liability company (LLC), S-corp or C-corp, you may be able to participate in your company's 401(k) plan. Eligibility depends on the type of income you receive and your company’s tax structure.
W-2 employees
If you're a W-2 employee, including S-Corp and C-Corp owners, you can make deferrals up to the annual deferral limit through Justworks payroll. Employer match and profit sharing contributions are made at the same time as they are for any other employees in the plan.
Partners with K-1 / Sch-C income
If you’re an owner or partner who does not receive a W-2 and instead receives K-1 / Sch-C income, you are still subject to the annual 401(k) deferral limit. You can defer up to the annual limit or 100% of your eligible compensation, whichever is less.
To make owner deferrals through Justworks payroll, you’ll need to:
- Elect a deferral rate in your Empower participant portal before the end of the plan year.
- Receive an Owner Draw through Justworks payroll. Owner deferrals must be processed through payroll to be contributed to the 401(k) plan.
- Once your deferral rate is elected, it will apply to eligible Owner Draw payments processed through payroll, provided your company is an eligible entity type.
In short, even if you receive K-1/Sch-C income, your 401(k) deferrals must still be processed through payroll and are subject to the annual deferral limit.
Which entity types are eligible for owner contributions?
The following entity types are generally eligible for owner contributions, since owners typically earn self-employment income:
- Limited partnerships
- Partnerships
- LLCs taxed as partnerships
- Single-member LLCs
- Sole proprietorships
401(k) contributions are not eligible for owner contributions for these entity types. For these entities, 401(k) contributions for all participants, including owners, must come through payroll:
- LLCs taxed as S-corporations
- LLCs taxed as C-corporations
- Any type of corporation
| Entity type | 401(k) via salary (W-2) | 401(k) via owner's draw (K-1) |
|---|---|---|
| S-Corp / C-Corp | Eligible | Not eligible |
| Partnership / LLC | Eligible | Eligible (via K-1 income) |
| Sole proprietorship | N/A | Eligible (via earned income) |
How do Partners / K-1 owners fund their 401(k) ?
To get started, log into your Empower participant portal and make an active deferral election. For eligible owners (partnerships and LLCs), any payment processed as an "Owner's Draw" will automatically trigger a 401(k) deduction based on your current election percentage.
If you wish to take an owner's draw without a 401(k) deduction, you'll need to manually update your deferral rate to 0% in the Empower portal before the payment is processed.
Exception: S-Corp and C-Corp owners
For S-Corp and C-Corp owners, 401(k) deferrals are based on eligible W-2 compensation and cannot be made from Owner Draw payments or other non-wage payments.
For S-Corp owners, Owner Draw payments are not eligible for 401(k) deferrals. Justworks automatically disables 401(k) deferrals on these payments, so you do not need to manually change your deferral rate to 0% in Empower if your company changes to an S-Corp tax structure.
C-Corp owners who work for the company are generally paid through W-2 wages. Their 401(k) deferrals can continue to apply to eligible W-2 compensation based on their active deferral election in Empower.
End of Year Funding
K-1 net income isn't finalized until your business closes its books after December 31. Because of this, our partners at Empower will email your plan administrator after the plan year ends to verify your actual income.
Admins should watch for an email titled “Required Income Verification for Partners with [Year] K-1 Income,” which is typically sent in January. Empower requires this verification to ensure that owners do not contribute more than the amount they're eligible to defer based on their actual earned income.
What if my plan administrator misses Empower's income verification request?
If your plan administrator misses Empower's verification request, and you're eligible and would like to contribute based on your earned income, you can reach out to Empower to request a manual contribution. Empower will need:
- Valid election intent — a record showing your intent to contribute for the prior year, such as your prior-year elective deferral rate.
- Income verification — proof of your K-1 income (draft or final statement) to validate your net earnings from self-employment.
Manual contributions are subject to Justworks' determination, based on your company's plan specifications, your entity's tax structure, and applicable tax and processing deadlines.
Tax deadlines:
- March 15: Contribution deadline for partnerships and S-Corps.
- April 15: Contribution deadline for C-Corps and sole proprietorships.
Please note, if an extension is filed, the deadline may move to September 15 or October 15.
Frequently Asked Questions
What is an owner's draw?
An owner's draw isn't "pay" in the traditional sense. It's a distribution an owner takes as a return on investment, from whatever profit is left over after salary and business expenses are paid.
What is a K-1 / Sch-C?
A K-1 / Sch-C is a tax document issued to an owner at the end of the year. Unlike a W-2, where your earnings are known the moment a check is cut, a partner's actual compensation isn't known until the company's profit or loss is calculated. This is why income verification is essential to determining eligibility to contribute.
What happens if an owner's net earnings are $0 at year-end due to business losses?
If net earnings are $0, any 401(k) contribution made against that "earned income" is invalid and must be removed from the account as a corrective distribution. Any associated employer match is moved to forfeitures.
Can an owner receive W-2 and K1 income for the same year?
Yes. IRS rules require S-Corp owners to pay themselves a "reasonable salary" via W-2, and their 401(k) contributions must come from that W-2 income. Any draw they take as an S-Corp owner is considered a return on investment rather than earned income, and isn't eligible for 401(k) deferrals.
Disclaimer
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.