Can an LLC Really Deduct 401k Contributions? Yes – But Don’t Make This Mistake + FAQs

Yes. An LLC can deduct 401(k) contributions – and it’s a smart tax move. How you take the deduction depends on your LLC’s tax classification (sole proprietorship, partnership, S-corp, or C-corp).

In every case, contributing to a 401(k) through your LLC can lower taxable income and help you save for retirement. Below, we break down exactly how each type of LLC can write off 401(k) contributions, key terms to know, potential pitfalls, and strategies to maximize your tax benefits.

Key Terms and Concepts for LLC 401(k) Deductions

• LLC (Limited Liability Company): A flexible business entity that can choose how it’s taxed (as a sole proprietorship, partnership, S-corporation, or C-corporation). The tax treatment of your LLC determines how 401(k) contributions are deducted.
• 401(k) Plan: An employer-sponsored retirement savings plan. LLC owners can set up a Solo 401(k) (for businesses with no employees other than the owner/spouse) or a traditional 401(k) plan if there are multiple employees. Contributions to a 401(k) are typically pre-tax, meaning they can be deducted and grow tax-deferred.
• Employee Deferral (Elective Deferral): Money an individual contributes from their own salary or earnings into the 401(k). This employee contribution is pre-tax (unless it’s a Roth 401(k) deferral) and reduces the person’s current taxable income. For example, an LLC owner on payroll can defer part of their salary into the 401(k).
• Employer Contribution: Money the business contributes to the 401(k) plan on behalf of the employee. This includes matching contributions or profit-sharing contributions made by the LLC. Employer contributions are tax-deductible to the business. An LLC owner essentially wears two hats (employee and employer), so the business can contribute to their 401(k) in addition to their own deferrals.
• Tax Deduction: An expense that reduces taxable income. A deductible 401(k) contribution means you can subtract the contribution from your business income or personal income (depending on structure) before calculating taxes. The result is paying less tax now.
• Sole Proprietorship: For tax purposes, a single-member LLC is treated as a sole proprietorship (disregarded entity) by default. The LLC’s income is reported on the owner’s personal tax return (Schedule C). The owner is considered self-employed, not an employee.
• Partnership: A multi-member LLC by default is taxed as a partnership. It files an informational partnership return, and each partner (member) gets a K-1 for their share of income. Partners are considered self-employed, not employees of the partnership.
• S-Corporation (S-Corp): An LLC can elect to be taxed as an S-corp. The business income passes through to owners, but owners who work in the business are treated as employees and must take a reasonable salary via W-2 payroll.
• C-Corporation (C-Corp): An LLC can elect C-corp taxation (less common for small LLCs). The business is taxed separately at corporate rates. Owners can be employees (drawing salaries) and/or receive dividends.
• Solo 401(k): Also known as an individual 401(k), it’s a 401(k) plan designed for a business owner with no employees (other than a spouse). It allows the owner to make contributions in the capacity of both employee and employer.
• Contribution Limit: The maximum amount that can be contributed to a 401(k) plan per year. This includes the sum of employee deferrals and employer contributions. For example, in 2023 the total contribution limit was $66,000 (or $73,500 if age 50+ with catch-up). Annual limits are set by the IRS and typically increase over time.
• Catch-Up Contribution: An additional amount people aged 50 or older can contribute beyond the standard limit. In a 401(k), the catch-up is $7,500 as of 2023, allowing older contributors to save more.
• Pre-Tax vs. Roth Contributions: Pre-tax 401(k) contributions (traditional) are deductible now and taxed when withdrawn in retirement. Roth 401(k) contributions are made with after-tax dollars (no immediate deduction), but qualified withdrawals in retirement are tax-free. (Important: employer contributions are always pre-tax.)

Understanding these terms will help clarify how LLC 401(k) deductions work in different scenarios. Now, let’s dive into the difference between contributing as an employee versus as an employer – a key concept for LLC owners.

Employer Contributions vs. Employee Deferrals in a 401(k)

When contributing to a 401(k) through your LLC, it’s crucial to distinguish between employee deferrals and employer contributions:

• Employee Deferral (Employee Contribution): This is the portion of income you elect to defer into your 401(k) instead of taking as take-home pay. For someone on payroll (like an S-corp or C-corp owner-employee), it’s taken out of your paycheck pre-tax. For a self-employed person (sole prop or partner), it’s the portion of profit you decide to contribute for yourself. Employee deferrals directly reduce your taxable income on your personal return. However, they do not reduce employment taxes (Social Security/Medicare) for W-2 earners – for example, an S-corp owner still pays FICA on their full salary, even the part contributed to the 401(k). The IRS sets a yearly limit on how much you can defer as an employee. For 2023, the elective deferral limit was $22,500 (or $30,000 if age 50+). This limit applies per person across all 401(k) plans they might have.
• Employer Contribution: This is an additional amount the LLC contributes to the plan on your behalf. It could be a matching contribution (say, dollar-for-dollar up to 5% of salary) or a profit-sharing contribution (a percentage of profits or compensation). Employer contributions are tax-deductible to the business as a business expense (often categorized as retirement plan contributions or employee benefits). For the individual, employer contributions are not counted as current income, so you don’t pay income tax or payroll tax on those contributions now. Employer contributions are limited too: generally up to 25% of compensation for each employee. If you are self-employed (sole proprietor or partner), effectively you as “employer” can contribute up to 20% of your net self-employment earnings (because you calculate it after self-employment tax deduction). The total of employer contributions is also capped by an annual overall limit (combined with your deferrals).

How They Work Together: If you’re the owner of an LLC and the only participant in the 401(k) (Solo 401k scenario), you get to contribute in both roles:

• As the “employee,” you defer part of your salary or self-employment income up to the annual limit.
• As the “employer,” your LLC can contribute additional funds (up to 25% of your compensation or 20% of net earnings).

Example: If you pay yourself a salary of $100,000 from your S-Corp LLC, you could defer $22,500 (employee) and the LLC could contribute up to $25,000 (employer, which is 25% of your $100k salary). That’s $47,500 invested in your 401(k) for the year, all of it tax-deductible in some way (the deferral reduces your personal taxable income, and the $25k employer contribution is a business deduction for the LLC).

Important: Only pre-tax contributions are deductible. If you choose to make Roth 401(k) contributions as the employee portion, those won’t reduce your taxable income now (they’re after-tax). The LLC can still deduct any matching contributions it makes (since employer contributions must be pre-tax).

Understanding this employee vs employer contribution distinction is key to maximizing deductions. Next, we’ll explore how the process and benefits vary based on your LLC’s tax classification.

How Each Type of LLC Can Deduct 401(k) Contributions

Your LLC’s tax status determines who gets the deduction and how contributions are made. We’ll cover each scenario: sole proprietorship (single-member LLC), partnership (multi-member LLC), S-corp election, and C-corp election.

Single-Member LLC (Sole Proprietor): 401(k) Deductions for Self-Employed Owners

A single-member LLC is taxed as a sole proprietorship by default, meaning the IRS treats the LLC’s income as your personal income. You don’t draw a W-2 salary from the business; instead, you are considered self-employed. Here’s how 401(k) contributions work for you:

• Solo 401(k) Plan: As a sole owner with no employees, you can set up an individual 401(k) (Solo 401k) for your business. You’ll effectively act as both employee and employer in the plan.
• Employee Contribution: You can contribute up to the annual elective deferral limit from your business earnings. Even though you aren’t on “payroll,” you choose an amount from your profits to contribute. For instance, if your LLC’s net profit is $80,000, you could defer, say, $19,000 of that into the 401(k) (assuming under the limit). This will show up as a deduction on your personal taxes (on Schedule 1 as an adjustment to income for self-employed retirement plans). It reduces your adjusted gross income (AGI), which lowers your federal (and possibly state) income tax.
• Employer Contribution: In addition to the deferral, your LLC can contribute as the employer. The maximum is generally 20% of your net self-employment income. Net self-employment income is your business profit minus half of your self-employment tax. For example, if your net profit is $80,000, after subtracting, say, ~$5,650 for half of SE tax, it’s about $74,350. Twenty percent of that is roughly $14,870. That could be the employer contribution on top of your deferral. The employer portion is also claimed on your personal tax return (it’s included in that self-employed retirement deduction).
• How the Deduction is Taken: All 401(k) contributions in this sole proprietor scenario are deducted on your personal tax return (Form 1040). There’s no separate corporate tax return for a sole proprietorship LLC. On your Schedule C (business income) you won’t list 401(k) contributions as an expense. Instead, you take the deduction on your 1040 (above-the-line deduction). It achieves the same outcome of reducing taxable income.
• Self-Employment Tax: One thing to note: these contributions do not reduce self-employment tax (Social Security/Medicare). You will still pay SE tax on your full net business profit before the 401(k) deduction. The deduction only lowers your income tax. This is a key difference between being a sole proprietor and an S-corp (as we’ll see later).

In short, a single-member LLC owner can fully deduct 401(k) contributions (both the portion as “employee” and “employer”) on their personal taxes. This can potentially shield tens of thousands of dollars from income tax each year.

Multi-Member LLC (Partnership): 401(k) Deductions for Partners

If your LLC has more than one member and has not elected corporate taxation, it’s treated as a partnership. The LLC will file an IRS Form 1065 partnership return, and each member (partner) receives a K-1 for their share of income. Partners are not considered employees, so no W-2 salaries for owners. Here’s how 401(k) contributions and deductions work:

• 401(k) Plan for Partnerships: The partnership (the LLC) can sponsor a 401(k) plan for the business. Both partners and any common-law employees can participate. For the partners, contributing to the 401(k) is similar to the sole proprietor scenario – they contribute as self-employed individuals. For any non-partner employees, contributions (like matches) are handled like a typical employer plan.
• Partner Contributions (Self-Employed): Each partner can make elective deferrals up to the IRS limit from their share of the partnership earnings. For example, if you have two equal partners and the partnership’s income allocated to you is $100,000, you could defer up to $22,500 (2023 limit) of that into the 401(k). Similarly, an employer contribution for your benefit can be made up to 20% of your net self-employment earnings (similar calculation as for sole proprietors).
• Deducting Partner Contributions: Things get a bit technical. A partnership cannot pay a partner a “salary”, and technically it doesn’t directly deduct contributions made for partners the way a corporation would for employees. Instead, the contribution on behalf of a partner might be treated as a guaranteed payment or simply recorded as a contribution that will reduce the partner’s share of income. In practice, the end result is that each partner will deduct their 401(k) contribution on their own personal tax return (as an adjustment to income, similar to a sole proprietor). The partnership’s profit allocated to the partner is reduced accordingly.
• Deducting Employee Contributions: If the LLC has employees (who are not partners), any employer match or contribution the partnership makes for those employees is a deductible business expense for the partnership. Those expenses will reduce the total partnership income passed through to partners. In other words, the LLC can write off contributions for employees on Form 1065, line for employee benefit programs.
• Self-Employment Tax for Partners: Just like sole proprietors, partners pay self-employment tax on their share of partnership earnings. 401(k) contributions made for partners do not reduce the income subject to self-employment tax – they reduce only income tax.
• Allocation and Limits: Each partner’s contribution limit is based on their own earnings from the partnership. One partner cannot use another’s earnings for contributions. The overall limit (e.g., $66,000 total in 2023) applies to each individual across all plans.

In summary, a multi-member LLC can absolutely facilitate 401(k) contributions for its partners, and those contributions are effectively deducted from each partner’s income. The mechanics involve personal deductions for partners and business deductions for any non-partner staff, but in the end everyone’s getting a tax break on 401(k) contributions.

LLC Taxed as an S-Corp: 401(k) Deductions via Payroll

Many LLC owners elect S-corporation status for potential self-employment tax savings. In an S-Corp scenario, the LLC (now an S-corp for tax purposes) must pay owner-members a W-2 salary if they are active in the business. The owners are both shareholders and employees. This setup changes how 401(k) contributions are contributed and deducted:

• 401(k) Plan Setup: The S-corp can set up a 401(k) plan for its employees. As an owner-employee, you participate just like any other employee would. If you’re the only employee (besides perhaps a spouse), this might be a Solo 401(k) plan treated as having an employer (the S-corp). If you have other employees, it’s a standard 401(k) plan covering all eligible staff.
• Employee Deferral (Owner’s Salary): As an employee of your S-corp, you can defer part of your W-2 salary into the 401(k). For instance, if your salary is $50,000, you might elect to contribute $15,000 of it to the 401(k) (within IRS limits). This deferral is taken out of your paycheck pre-tax. On your W-2 at year-end, your Box 1 wages will be lower by the amount you contributed (so it might show $35,000 in taxable wages if you deferred $15k). That means you avoided income tax on that $15k this year. (Your W-2 will still show the full $50k in Box 3 and 5 for Social Security/Medicare wages, because 401(k) deferrals don’t avoid those payroll taxes.)
• Employer Contribution: Your LLC (the S-corp) can also contribute additional funds to your 401(k) as an employer contribution. Commonly, this is done as a profit-sharing contribution at year-end, up to 25% of your compensation. Using the $50k salary example, the S-corp could contribute up to $12,500 (25% of $50k) as an employer contribution for you. If you had other employees, you would likely contribute a similar percentage for them too (to stay within non-discrimination rules, or you might set up a safe harbor 401(k) to automatically satisfy fairness tests by contributing a set minimum for employees).
• How the S-Corp Deducts It: The S-corp deducts both your salary and the employer 401(k) contribution as business expenses on the corporate tax return (Form 1120S). The salary (including the portion you deferred) is a wage expense. The employer contribution is usually deducted as an employee benefit or pension/profit-sharing expense. These deductions reduce the S-corp’s net profit. Since an S-corp is a pass-through entity, lowering the corporate profit means less income flowing through to you on the K-1 (which is good for reducing taxes on profits).
• Personal Tax Impact: You, as the employee, have a lower taxable salary because of the deferral. You’ll pay yourself less in taxable wages and more in untaxed retirement contributions. At the individual level, you don’t need to take a separate deduction for the 401(k) – the tax benefit is already reflected by the reduced W-2 income and the S-corp’s deduction. Your K-1 income (share of business profits) is also lower if the S-corp made employer contributions, since that was a business expense. Overall, your personal taxable income (wages + K-1) is lower thanks to the 401(k) contributions.
• Employment Tax Savings: Here’s a key advantage. While 401(k) deferrals don’t avoid Social Security and Medicare taxes (FICA) on your salary, employer contributions do. For example, that $12,500 employer contribution is not subject to FICA taxes, unlike if you had taken that money as additional salary. This means an S-corp owner effectively can move money into a 401(k) without paying the 15.3% combined payroll tax on that portion. This is one reason S-corps are popular: you pay yourself a reasonable salary (on which you pay payroll taxes), then use additional profits as 401(k) contributions (and possibly distributions) which are not subject to payroll tax.
• Limits: The same overall IRS limits apply. Your total contribution (deferral + employer) cannot exceed the annual cap (e.g., $66k in 2023). Also, the 25% of salary limit means you need a high enough salary to max out contributions. If you want to contribute the absolute max and you’re under 50, you’d need to have sufficient salary to allow both a $22,500 deferral and ~$43,500 employer contribution (which would require $174,000 salary to hit 25% = 43.5k). Many S-corp owners set their salary at a level that balances payroll tax savings with maximizing retirement contributions.

In summary, an LLC taxed as an S-corp can deduct 401(k) contributions with a two-pronged approach: the owner’s deferrals reduce personal taxable income, and the company’s contributions reduce business income (and avoid payroll tax). It’s a powerful combination that can lead to big tax savings and retirement stash for the owner. Just remember, you must be on payroll and pay yourself wages to take advantage of this – no wage, no 401(k) contributions in an S-corp scenario.

LLC Taxed as a C-Corp: 401(k) Contributions as a Corporate Expense

If your LLC elects to be taxed as a C-corporation, it operates as a separate tax-paying entity (like a traditional corporation). C-corps pay corporate income tax on profits, and you (the owner) pay tax on any salary or dividends you receive. Here’s how 401(k) contributions work with C-corp taxation:

• 401(k) Plan: The C-corp (your LLC in this form) sets up a 401(k) plan for employees. As an owner-employee, you participate like any other employee. If you’re the only one, it’s essentially a company 401(k) just for you (and any spouse employee), very similar to a Solo 401(k) but technically under a corporate umbrella.
• Employee Deferral: You draw a salary from the C-corp as an employee. You can defer a portion of your salary into the 401(k) up to the annual limit. This works the same as described for S-corp: your W-2 taxable income is reduced by the deferral amount. For example, $120,000 salary with $20,000 deferred means you’re taxed on $100,000 of wages on your personal return.
• Employer Contribution: The C-corp can contribute up to 25% of your salary as an employer contribution to the 401(k). If your salary were $120k, up to $30k could be contributed by the company for you. Again, if there are other employees, similar contributions (or at least proportional contributions) would likely be needed for them.
• Corporate Tax Deduction: The C-corp deducts the full amount of contributions it makes (employer portion), as well as your salary (including the deferred portion) as business expenses. This reduces the corporation’s taxable profit. For example, say the company had $200,000 in gross profits and paid you $120k salary and $30k employer 401(k) contribution. The $150k total is deductible, leaving only $50k of taxable income in the corporation. At the current 21% corporate tax rate, that saves a significant amount of corporate tax. Essentially, every dollar contributed to your 401(k) is a dollar not taxed at 21% by the IRS at the corporate level.
• Personal Tax: On your personal side, you’ve reduced your current taxable wages by your deferral. The employer contribution doesn’t show up as taxable wages to you, so you don’t pay income tax or FICA on that portion either. You’ll ultimately pay taxes when you withdraw from the 401(k) in retirement (unless it’s Roth), but presumably at a later time (and possibly lower rate).
• Double Taxation Note: One reason to do retirement contributions in a C-corp is to avoid the double-taxation issue on profits. If a C-corp simply left profit in the company or paid it as dividends, it would get taxed at 21% (federal) and then dividends taxed again on the personal return. By using that money to pay a deductible contribution to your 401(k), you avoid the corporate tax and defer personal tax – a double win.
• Comparison to S-Corp: Unlike an S-corp, there is no pass-through income; it’s either salary or corporate profit. So maximizing 401(k) contributions in a C-corp directly lowers corporate taxes. Payroll taxes (Social Security/Medicare) still apply on your salary (and deferrals don’t reduce those), similar to S-corp. Employer contributions again dodge payroll taxes.

In short, an LLC taxed as a C-corp can fully deduct contributions to a 401(k) plan as a business expense. The owner benefits by shifting what would have been profit (taxed at 21% + possibly personal tax on dividends) into a tax-deferred retirement account. The strategy parallels the S-corp in many ways, except you’re also mitigating corporate-level tax.

Comparison of 401(k) Deduction Treatment by LLC Tax Classification

To recap the differences in a more visual way, here’s a comparison:

Every structure allows for a deduction; the difference lies in who claims it (the business or the individual) and how it interacts with employment taxes. Next, we’ll look at the concrete limits on contributions and what kind of tax benefits these deductions can yield.

401(k) Contribution Limits and Tax Benefits for LLC Owners

To effectively deduct 401(k) contributions, you must stay within IRS contribution limits. Here are the key limits and how they translate into tax savings:

Annual Contribution Limits (2023 Example):

• Employee Elective Deferral Limit: $22,500 per year (if you’re under age 50). If you’re 50 or older, you can make an additional $7,500 catch-up contribution, bringing your deferral up to $30,000. This limit is per person across all 401(k) plans – if you have multiple jobs or businesses, your combined deferrals can’t exceed this.
• Employer Contribution Limit: Up to 25% of compensation (or 20% of net self-employed income) can be contributed by the employer. For someone with a $100,000 salary, that’s up to $25,000. There’s no extra catch-up for employer contributions; catch-up applies only to the employee portion if over 50.
• Total Contribution Limit: $66,000 per person in 2023, including both employee and employer contributions (or $73,500 with catch-up if 50+). This is sometimes called the “annual addition” limit for defined contribution plans. It means if you maxed out your deferral ($22,500) and you’re under 50, the most the employer can add is $43,500 to reach $66k total. If you hit the $66k, that likely means you have a high income to support that level of contribution.

Contribution limits are indexed to inflation and typically rise every year or two. For instance, in 2024 the deferral limit increased to $23,000 (under 50) and the total limit to $69,000. Always check the current IRS limits for the year you’re contributing.

Tax Benefits of Maximizing Contributions:

Every dollar you contribute pre-tax to a 401(k) is a dollar not taxed this year. The immediate benefits include:

• Lower Income Tax: Contributions reduce your taxable income, which can potentially drop you into a lower tax bracket or at least reduce the marginal tax you pay. For example, if you contribute $20,000 and you’re in the 24% federal tax bracket, that’s roughly $4,800 less in federal taxes for the year (24% of $20k). State income tax savings would add to that if your state has an income tax.
• Reduced Pass-Through Income (For S-Corps/Partnerships): For pass-through entities, any employer contributions (and wage deductions) reduce the business profit passed to owners. Less pass-through income means less income to report on your personal return, saving you taxes at your personal rate on that money.
• Corporate Tax Savings (For C-Corps): If you operate as a C-corp, the deduction for contributions directly saves the corporate tax. At 21% corporate tax, a $20,000 employer contribution saves the corporation $4,200 in taxes. If you’re the owner, you’ve effectively moved money out of the company into your retirement without that double taxation hit.
• No FICA on Employer Contributions: As mentioned, employer contributions are not subject to Social Security and Medicare taxes. If you are an S-corp or C-corp owner, choosing to put an extra, say, $10,000 as an employer 401(k) contribution instead of as additional wages saves about $1,530 in combined payroll taxes (15.3% of $10k, split between employer and employee portions). For high earners above the Social Security wage base, you’d save the 2.9% Medicare (and additional 0.9% if over $200k) on that amount.
• Tax-Deferred Growth: While not an immediate deduction benefit, remember that once money is in your 401(k), it grows tax-deferred (or tax-free in the case of Roth). That means the contributions you deducted now can potentially earn investment returns for years without being taxed until withdrawal, maximizing the compounding.

Table: 401(k) Contribution Limits and Potential Tax Savings (2023)

Note: The actual tax savings depend on your marginal tax rate (which could be higher or lower than 22%), and payroll tax situation. High-income individuals in the top brackets (32%–37%) stand to save even more per dollar contributed. Always consider both federal and state taxes for a full picture.

By understanding the limits, you can aim to contribute as much as feasible within those limits to reap the maximum tax reward. Next, let’s illustrate with some real-world examples and then discuss pitfalls to avoid and myths surrounding LLC 401(k) deductions.

Real-World Examples of LLC 401(k) Contribution Deductions

To make this concrete, here are a couple of scenarios showing how an LLC owner can deduct 401(k) contributions and how it affects their taxes:

Example 1: Single-Member LLC (Sole Proprietor) Scenario
Situation: Jane is the sole owner of an LLC with no employees. In 2023, her business (an LLC taxed as a sole prop) earned $100,000 in net profit from self-employment. She sets up a Solo 401(k) for her LLC.

• Employee Contribution (Deferral): Jane decides to contribute the maximum $22,500 as an “employee” to her 401(k). This is 22.5% of her $100k profit.
• Employer Contribution: Based on her $100,000 profit, after accounting for the deduction of half her self-employment tax (approximately $7,065), her net earnings for contribution purposes are about $92,935. She can contribute up to 20% of that as an employer. She contributes $18,500 (roughly 20%).
• Total Contribution: Jane puts $41,000 into her 401(k) for the year ($22.5k + $18.5k).
• Tax Deduction: On her personal tax return, she gets to deduct the $41,000. This reduces her taxable income from $100,000 down to $59,000. If she’s in the 24% federal tax bracket, that could save her around $9,840 in federal income tax alone.
• Self-Employment Tax: She still pays SE tax on $100,000 (around $14,130, which is unchanged by the retirement contribution). But she’s okay with that because the income tax savings and retirement savings are substantial.
• Outcome: Jane has significantly lowered her current tax bill and has $41k growing in her retirement account. Essentially, she turned a chunk of what would have been her taxable profit into a long-term investment for herself, with the blessing of the IRS.

Example 2: Multi-Member LLC (S-Corp Election) Scenario
Situation: John and Lisa are two owners of an LLC that elected to be taxed as an S-corporation. The business has healthy profits. In 2023, the company’s net income (before owner compensation) is $200,000. John and Lisa each own 50%. They both work in the business. They decide to use a 401(k) to maximize their tax benefits.

• Salaries: The S-corp pays each of them a W-2 salary of $80,000 (deemed reasonable for their roles). So, $160k of the $200k profit goes out as salaries, leaving $40k as remaining profit (which will pass through as K-1 income split $20k each).
• 401(k) Deferrals: Both John and Lisa defer $20,000 of their $80k salary into the 401(k). Each will see a W-2 showing $60,000 taxable wages (because $20k went to 401k). Collectively, they deferred $40k.
• Employer Contributions: The S-corp makes an employer contribution of 25% of each owner’s $80k salary = $20,000 for John and $20,000 for Lisa. That’s $40k total employer contributions. (They also must contribute for their one other employee, say the employee earns $40k, 25% = $10k employer contribution for that employee.)
• Business Deductions: The company deducts the $160k in wages and the $50k in total employer contributions ($20k + $20k for owners, $10k for employee). So instead of $200k profit, the taxable profit on the S-corp return is now $200k – $160k – $50k = -$10k (essentially zero taxable profit; they used it all on compensation and contributions). The S-corp pays no corporate tax (S-corps usually don’t anyway), and the K-1 pass-through income to each owner is only $0 (since there was no remaining profit; in fact a slight tax loss that may carry or adjust basis).
• Tax Savings for Owners: Each owner now has $60k of W-2 income and $0 K-1. Without the 401(k) plan, they would have had $80k W-2 and $20k K-1 each, meaning $100k taxable each. Thanks to the 401(k) contributions, each is now taxed on only $60k of wages. If John and Lisa are in, say, the 22% tax bracket, each saved roughly $8,800 in federal tax ($40k reduction in taxable income * 22%). Together that’s ~$17,600 saved. Plus, by putting that $20k employer contribution each, they avoided payroll taxes on $40k total (saving the company and them roughly $6,120 in FICA taxes combined).
• Retirement Benefits: John and Lisa each socked away $40k in their 401(k) ($20k deferral + $20k employer). They effectively turned what would have been current taxable income into retirement investments.
• Employee Consideration: Their one employee also got a $10k employer contribution. The company wrote that off too, and it helps keep the plan fair and compliant. John and Lisa see it as a worthwhile expense since it allows them to maximize their own savings and the employee benefits from it as well.

These examples show how, whether you’re solo or have a partner (or employees), using an LLC 401(k) contribution deduction can dramatically reduce current taxes while funding your future. Jane (sole proprietor) saw a big cut in her taxable income, and John/Lisa (S-corp) basically zeroed out their company profit and cut their personal taxable income significantly.

Every situation will differ, but the principles remain: contributions are deductible, and you can adjust your salary or profit allocations to make the most of the limits. Next, let’s look at some pitfalls and misconceptions so you can avoid common mistakes when implementing these strategies.

Pitfalls to Avoid When Deducting 401(k) Contributions as an LLC

While deducting 401(k) contributions is highly beneficial, there are a few common pitfalls and mistakes LLC owners should watch out for:

• Failing to Establish a Plan Properly: You can’t deduct 401(k) contributions if you haven’t actually set up a qualified 401(k) plan for your LLC. Make sure to establish the 401(k) plan documents, have an account for the plan, and follow IRS rules. Simply depositing money into a separate savings or IRA is not the same; it must be a qualified 401(k).
• Missing the Contribution Deadline: For employee deferrals, contributions usually must be made by the end of the calendar year (or by the employee’s last paycheck of the year). Employer contributions generally can be made by the business’s tax filing deadline (plus extensions). If you miss those deadlines, you might lose the deduction for that year. Plan ahead, especially for year-end profit-sharing contributions from your LLC.
• Over-Contributing (Exceeding Limits): It’s easy to get excited about tax savings and accidentally contribute over the IRS limits, especially if you have multiple retirement plans or jobs. For instance, if you have both a day job with a 401(k) and your own LLC’s 401(k), your combined deferrals can’t exceed $22,500 (in 2023). Similarly, if you contribute to a SEP IRA and a 401(k), those employer contributions combine toward the annual addition limit. Excess contributions can lead to penalties and require corrective distributions. Always track your contributions across all plans and stick to the limits.
• Not Including Eligible Employees: If you have employees in your LLC, you generally must include them in the 401(k) plan after they meet eligibility (e.g. one year of service, age 21, etc., unless you have a different plan design). A pitfall is trying to exclude employees improperly or only contributing for yourself. This can cause the plan to fail IRS nondiscrimination tests. If your plan is not a Solo 401(k) (only owner/spouse), ensure you either make necessary contributions for employees or use a safe harbor plan design to avoid running afoul of rules. Failing to cover employees can disqualify the plan and ruin your deductions (not to mention lead to penalties).
• Neglecting “Reasonable Compensation” (S-Corps): If you have an S-corp LLC, you might be tempted to set your salary super low to minimize payroll taxes and then contribute mostly employer profit-sharing to the 401(k). Be careful: the IRS requires S-corp owner-employees to take a reasonable salary for their work. If you take an unreasonably low salary, it could draw IRS scrutiny. Also, remember your max employer contribution is 25% of that salary – a too-low salary limits how much you can contribute to the 401(k) anyway. Balance salary vs. distributions wisely.
• Assuming All Contributions Cut All Taxes: Some owners incorrectly assume that 401(k) contributions eliminate self-employment tax or all types of taxes. As we noted, self-employment tax (Social Security/Medicare) is still calculated on your net earnings for sole props/partners before the deduction, and W-2 wages for S-corps still incur FICA tax on the full salary amount (deferrals don’t reduce FICA). So, while 401(k) contributions slash income tax, you might still face full employment tax on those earnings. Plan accordingly – you may combine an S-corp strategy with 401(k) contributions to mitigate this, but understand the distinction.
• Ignoring Plan Costs and Admin: Running a 401(k) plan, especially for multiple participants, comes with administrative duties and possibly fees. You may need to file an annual Form 5500 for the plan (once assets are above a threshold or if you have employees). While these costs don’t usually outweigh the tax benefits, don’t overlook them. Make sure to count any administrative fees or financial advisor costs as part of the cost of the plan. The good news is that the business can often deduct those plan administration fees as well.
• Mixing Up Roth vs Traditional Contributions: If you opt for Roth 401(k) contributions (after-tax) for yourself or employees, remember that Roth contributions are not tax-deductible. A mistake is thinking you’ll get a deduction when you actually chose Roth. You still get the benefit of tax-free growth, but not an upfront deduction. Ensure you (and your payroll) categorize contributions correctly between pre-tax and Roth. Employer contributions are always pre-tax (deductible), regardless of whether the employee chooses Roth or pre-tax for their portion.

Avoiding these pitfalls ensures you actually get the full benefit of the deductions and don’t run into compliance issues. Now let’s address some misconceptions that often come up regarding LLCs and 401(k) contributions.

Common Misconceptions and Myths about LLC 401(k) Contributions

There are several myths floating around about LLCs and 401(k) deductions. Let’s debunk the most common ones:

• Myth 1: “LLCs Can’t Have 401(k) Plans if They Have No Employees.”
  Reality: Even if your LLC has no employees besides yourself (and perhaps your spouse), you can have a 401(k) plan — specifically a Solo 401(k). Solo 401(k)s are meant for owner-only businesses. Your LLC doesn’t need additional employees to sponsor a 401(k). You as the owner participate, and you can contribute in both capacities. This plan is just as legitimate as any big company 401(k) and gives you the same deduction benefits.

• Myth 2: “Only Corporations Can Deduct 401(k) Contributions, Not LLCs.”
  Reality: The confusion here is between the legal structure (LLC) and tax classification. An LLC can choose to be taxed as a sole prop, partnership, S-corp, or C-corp — all of which can take 401(k) deductions in some form. Deducting 401(k) contributions is not limited to C-corps. For example, a sole proprietor (which an LLC can be) deducts their contributions on their personal return; an LLC taxed as an S-corp deducts them on the business return. All flavors can get the tax break. LLCs are absolutely eligible for retirement plan deductions, contrary to this myth.

• Myth 3: “401(k) Contributions Let Me Avoid All Taxes (Income and Self-Employment).”
  Reality: 401(k) contributions are powerful, but they don’t eliminate every tax. They do avoid income taxes now (federal and state), but as discussed, if you’re self-employed, you still owe self-employment taxes on that income. If you’re an S-corp owner, you still pay FICA on your wages before deferral. Also, these contributions are tax-deferred, not tax-free forever – you’ll pay income tax on traditional 401(k) withdrawals in retirement (unless using Roth). They’re a tax postponement and reduction strategy, not a tax magic wand.

• Myth 4: “I Can Contribute Unlimited Amounts as an LLC Owner.”
  Reality: There are strict IRS limits on how much you can contribute each year (as detailed earlier). Being a business owner doesn’t let you exceed the annual 401(k) limits. In fact, if you have multiple businesses or jobs, you have to be careful to aggregate contributions properly. The Solo 401(k) often allows higher contributions than, say, an IRA (which is limited to $6,000–$7,000), but it’s not unlimited. “Unlimited contributions” would defeat the purpose of having limits to prevent the wealthy from sheltering all income tax-free, so the IRS caps it.

• Myth 5: “If My LLC Contributes to My 401(k), I Can’t Also Contribute Personally.”
  Reality: You can do both. In fact, maximizing both your personal deferral and an employer contribution is how you reach the upper limit. Some think it’s one or the other, but the rules explicitly allow an employee and employer contribution in the same plan (they just have separate limits). So as an owner, you contribute as the employee up to $22.5k (for example) and then have your LLC contribute more on top. The total just has to stay within the combined limit.

• Myth 6: “SEP IRAs Are the Only Option for LLCs – 401(k)s are for big companies.”
  Reality: Solo 401(k)s often beat SEP IRAs for many LLC owners. While SEP IRAs are simpler to set up and also allow employer contributions, they don’t allow an employee deferral and have the same total contribution cap. A Solo 401(k) allows you that extra $22.5k deferral that a SEP won’t, which means at lower income levels, a 401(k) lets you contribute (and deduct) much more. Also, 401(k)s can have Roth options and loan features that SEP IRAs lack. LLCs can choose either, but thinking a 401(k) is only for large companies is outdated – plenty of single-person businesses use Solo 401(k)s to maximize retirement savings and deductions.

Clearing up these misconceptions can help LLC owners confidently move forward with setting up and deducting 401(k) contributions. Finally, let’s address some frequently asked questions that gather all these points in Q&A form.

FAQs on LLC 401(k) Contribution Deductions

Q: Can an LLC contribute to a 401(k) plan?
A: Yes. An LLC, regardless of tax classification, can establish a 401(k) plan (or Solo 401k for one-owner businesses) and contribute to it. Those contributions are generally tax-deductible, either by the business or the owner.

Q: Is a 401(k) contribution a business expense for an LLC?
A: It can be. If your LLC is taxed as an S-corp or C-corp, employer 401(k) contributions count as a business expense. For sole proprietors or partners, it’s deducted on the individual owner’s tax return instead of the LLC’s Schedule C/1065.

Q: How much can an LLC owner contribute to a 401(k)?
A: Up to the IRS limits. In 2023, that’s $22,500 as an employee (under 50) plus employer contributions up to a total of $66,000 (or $73,500 if age 50+). The exact amount depends on your income (e.g., 25% of salary for employer part, or 20% of net self-employed income).

Q: Do 401(k) contributions reduce self-employment tax for LLC owners?
A: No, not for self-employment tax. If you’re a sole proprietor or partner, you still pay self-employment tax on your full net earnings before 401(k) deductions. In an S-corp, you pay FICA on full wages. 401(k) contributions mainly reduce income tax, not the Social Security/Medicare taxes.

Q: Can a single-member LLC deduct 401(k) contributions?
A: Absolutely. A single-member LLC can set up a Solo 401(k). The owner’s contributions (both the elective deferral and employer portion) are deducted on the owner’s personal tax return. This lowers taxable income significantly.

Q: Does my LLC need to make a profit to contribute to a 401(k)?
A: Yes, in general. Contributions are based on earned income. A loss-making business can’t contribute because there’s no compensation or profit to base it on. If you have little profit or low salary, that caps what can be contributed. So ensure your LLC has sufficient earnings or pay yourself enough wages (in an S-corp) to utilize the 401(k) contribution limits.

Q: Can an LLC deduct matching contributions made to employees’ 401(k)s?
A: Yes. Any matching or profit-sharing contributions your LLC makes for employees (including owner-employees) are deductible business expenses. They reduce the business’s taxable income (or pass-through profit). Just remember, you generally must extend the match to all eligible employees, not just owners.

Q: Solo 401(k) vs. SEP IRA – which is better for an LLC?
A: A Solo 401(k) often allows higher contributions at the same income, because you can contribute both an employee deferral and employer amount. SEP IRAs only allow employer contributions (up to 20% of profit), so at lower incomes a Solo 401k lets you put away more. Solo 401k also offers Roth option and loans. However, SEP IRAs are simpler (no annual 5500 filing until very large balances). Both are deductible; the “better” depends on your goals, but many LLC owners favor Solo 401(k) for maximum tax-deferral.

Q: Where do I deduct 401(k) contributions for a single-member LLC on taxes?
A: You’ll deduct it on your personal Form 1040. Specifically, it goes on Schedule 1 (Additional Income and Adjustments), as an adjustment to income for “self-employed retirement plans.” It reduces your Adjusted Gross Income. You do not deduct it on the Schedule C for the business.

Q: Can I still contribute to an IRA if my LLC has a 401(k) plan?
A: Yes, you can contribute to a traditional or Roth IRA on top of your 401(k). However, if you or your spouse are covered by a retirement plan at work (including an LLC’s 401k), the deductibility of traditional IRA contributions may be phased out at certain income levels. Roth IRA contributions also have income limits. But having an LLC 401(k) doesn’t prevent you from contributing to an IRA; it just might affect the tax deductibility or eligibility based on income.