Can K-1 Income Really Be Used for 401k Contributions? + FAQs
- April 1, 2025
- 7 min read
Yes. K-1 income can fund 401(k) contributions if it’s earned self-employment income — but no, purely passive K-1 distributions (like S-corp profits) don’t qualify as “compensation” for 401(k) purposes.
(It’s no wonder 59% of small business owners aren’t sure how to maximize retirement savings!)
🏛️ Clear IRS rules on when K-1 income counts as earned income for 401(k) contributions
⚠️ Pitfalls to avoid (e.g. S-corp distribution mistakes that could void your contribution)
📚 Key terms decoded – K-1 forms, earned income, partnerships vs S-corps, and more
💡 Real-world examples – see how a partnership partner vs an S-corp owner each handle 401(k) contributions
🌍 50-state breakdown – discover how each state taxes and treats 401(k) contributions from K-1 income
The Clear Answer: Using K-1 Income for 401(k) Contributions
In simple terms, K-1 income can be used for 401(k) contributions if it’s truly “earned income.”
Under federal law, 401(k) (and other retirement plan) contributions must come from compensation — essentially your work income. For a self-employed individual or partner, that “compensation” is your net earnings from self-employment.
If your Schedule K-1 represents active business income (for example, you’re a general partner in a partnership or an LLC member who materially participates in the business), then those earnings count as self-employment income. In that case, you are allowed to base 401(k) contributions on that K-1 income.
However, not all K-1 income is created equal. If your K-1 is from an S corporation’s profit distributions or from a partnership where you’re merely a passive investor, that income is not considered earned income.
S-corp distributions bypass self-employment tax and are treated as investment returns, not wages — the IRS explicitly excludes those from “compensation” for retirement plan purposes.
Likewise, a limited partner’s share of income (when you don’t actively work in the business) is typically considered passive. Bottom line: K-1 income qualifies for 401(k) contributions only when it’s derived from your labor or active involvement in the business.
If it’s just a passive share of profits, it won’t count, and you cannot contribute based on it.
Federal law makes this distinction crystal clear. A partner’s earned income is defined as income for services rendered to produce the partnership’s profits. If you’re actively working in a partnership (paying self-employment tax on the K-1 amount), that income is eligible for 401(k) contributions.
On the other hand, distributions from an S-corp (reported on a K-1) are specifically excluded from the definition of net self-employment earnings — meaning you can’t use S-corp K-1 distributions to contribute to a 401(k). In an S-corp scenario, only the W-2 salary you draw is considered “compensation” for 401(k) purposes.
In summary, yes, you can contribute K-1 income into a 401(k) if it’s the kind of K-1 income that counts as self-employed earnings (e.g. from a partnership or sole proprietorship). No, you cannot do so if the K-1 income is just investment or dividend-like income (like S-corp shareholder payouts or silent-partner profits). Next, we’ll dive into common mistakes around this rule and break down all the terminology and nuances you need to know.
Common Pitfalls: Avoid These K-1 Contribution Mistakes
Even savvy business owners can stumble when navigating K-1 income and 401(k)s. Here are some common pitfalls to watch out for:
⚠️ Treating S-corp distributions as eligible – A big mistake is assuming your S-corporation’s K-1 income can be contributed. It cannot. Only your W-2 wages from the S-corp are eligible for 401(k) contributions.
⚠️ Assuming all K-1 income is “earned” – Don’t automatically count partnership K-1 income as compensation. If you’re a limited partner or not actively involved, that income is passive and not eligible for retirement plan contributions.
⚠️ Not paying yourself wages in an S-corp – S-corp owner-employees must take a reasonable salary. If you take zero salary (and all income as K-1 distribution), you’ll have no compensation to base 401(k) contributions on (and you’d also violate tax rules on reasonable compensation).
⚠️ Ignoring the self-employment tax factor – For partners and sole proprietors, your contribution limit is based on net self-employment earnings after deducting one-half of your self-employment tax. A pitfall is trying to contribute too much by forgetting this adjustment. (Put simply, you can’t contribute based on your gross K-1 amount; you must calculate the allowable portion.)
⚠️ Overlooking multiple-plan limits – If you have both a day-job 401(k) and a solo 401(k) for your K-1 income, remember that the employee deferral limit is combined across all plans. A common error is trying to defer the maximum salary amount in each plan – which is not allowed. (You can only defer up to the annual limit once across all 401(k)s, though you can still do separate employer contributions in the self-employed plan.)
⚠️ Missing plan setup deadlines – Self-employed folks often don’t realize that a solo 401(k) must be established by year-end (December 31) of the tax year to make contributions for that year’s income. If you wait until you get your K-1 (often in March of the following year), it’s too late to set up a 401(k) for that past year. (You could still do a SEP-IRA, but not a 401(k), after year-end.)
Avoiding these pitfalls will ensure you don’t inadvertently violate IRS rules or miss out on contribution opportunities. Next, let’s clarify the key terms and concepts at play so you have a solid foundation.
Key Terms Defined: K-1, Earned Income, Self-Employment, and More
Understanding the terminology is half the battle. Here are key terms and concepts related to using K-1 income for retirement contributions:
Schedule K-1: This is a tax form used by pass-through entities (partnerships, S-corporations, some trusts) to report each owner’s share of income, deductions, and credits. A K-1 (Form 1065) comes from a partnership or LLC, and a K-1 (Form 1120S) comes from an S corporation. Crucially, the nature of the income on a K-1 (earned vs passive) depends on the entity type and your role.
Partnership vs. S-Corporation Income: Income from a partnership (or LLC taxed as a partnership) can be self-employment income if you’re an active partner. This means it’s subject to self-employment tax and considered earned income. In contrast, an S-corp’s profit distributions are not subject to self-employment tax (they’re considered a return on investment), and thus are not treated as earned income for purposes like 401(k)s. S-corp owner-employees receive W-2 wages for their labor; only those wages count as compensation for contributions (the leftover K-1 distribution portion does not).
Earned Income: In the retirement plan context, “earned income” means income you earn from working — either wages, salaries, or net income from self-employment. For a self-employed individual or partner, your earned income is basically your business profit attributable to your personal services. If you simply invest money or own a stake in a business but don’t work in it, the income you get is unearned (for our purposes) and won’t qualify for plan contributions.
Net Earnings from Self-Employment: Often used interchangeably with earned income for partners, this is your business’s profit after deducting business expenses, and after a special deduction of one-half of your self-employment tax. It’s the figure that matters for calculating how much you can contribute to a self-employed retirement plan. For example, if a partnership allocates you $100,000 of business income on your K-1, your “net earnings” might be roughly $92,000 after the half SE tax deduction. Your maximum 401(k) contribution (between employee deferral and employer profit-share) would be based on that $92,000, not the full $100k.
401(k) Plan: A 401(k) is an employer-sponsored retirement plan allowing contributions from employees (salary deferrals) and often employers (matches or profit-sharing). For self-employed individuals (including partners), a “one-participant 401(k)” or solo 401(k) is essentially the same kind of plan, except you wear both the employee and employer hats. The key is that any contributions must come from eligible compensation. For an employee of a company, eligible compensation is their W-2 wages. For a self-employed person, it’s their earned income from the business.
Self-Employed 401(k) (Solo 401(k)): This is a 401(k) plan designed for self-employed individuals with no employees (other than a spouse). With a solo 401(k), you can contribute to your account in two ways: elective deferrals up to the annual limit (just as any employee could, e.g. $22,500 for 2023, or $30,000 if age 50+), and employer contributions (profit-sharing) up to 20–25% of your net self-employment earnings. The total of both cannot exceed an overall cap ($66,000 for 2023, or $73,500 with catch-up). The important point is that your solo 401(k) contributions are based on your self-employment income (from your K-1 or Schedule C) — which must be earned income.
SEP-IRA: While the question is about 401(k)s, it’s worth noting the SEP-IRA, another popular self-employed retirement plan. A SEP is funded solely by employer contributions (no employee deferrals) and also uses net self-employment income as the basis. The same rule applies: you can contribute to a SEP-IRA from K-1 income only if that income is from self-employment (active partnership earnings). If you have only S-corp K-1 distributions, you cannot fund a SEP either, since there’s no self-employment income. (SEP contributions, like solo 401(k) contributions, are generally calculated as 20% of net SE earnings for a self-employed person.)
By understanding these terms, you can now clearly see why some K-1 income qualifies for retirement contributions and some does not. Next, let’s look at how this plays out in real-life scenarios for different types of business owners.
Real-Life Examples: How K-1 Income 401(k) Contributions Work in Practice
Let’s illustrate with a few detailed examples. These scenarios show how different types of K-1 income holders approach 401(k) contributions:
Example 1: Active Partner in an LLC Contributes to a Solo 401(k)
Alice is a 50% partner in an LLC (taxed as a partnership) that develops software. She works full-time in the business – clearly an active partner. In 2025, her K-1 shows $150,000 of ordinary business income (her half of the profits), and Box 14 of the K-1 indicates this income is subject to self-employment tax (meaning it’s earned income). Alice has a solo 401(k) for herself through the partnership. How much can she contribute?
Employee 401(k) Deferral: First, Alice can contribute the standard employee 401(k) amount. In 2025, the limit is $22,500 (or $30,000 if age 50 or above – catch-up contribution). Since Alice is under 50, she can defer up to $22,500 of her earned income into the 401(k) plan. She decides to max this out. That $22,500 will reduce her taxable income and her partnership profits for tax purposes.
Employer Profit-Sharing: As a self-employed person, Alice can also make an employer contribution to her account, up to 20% of her net earnings from self-employment. Her $150,000 profit isn’t all considered “net” for this calculation – we must subtract half of her self-employment tax. The self-employment tax on $150k is roughly $21,195, so half of that is about $10,598. After subtracting that, her net self-employment income is about $139,402. Additionally, this net is calculated after accounting for any retirement plan contribution. This is a bit circular, but there are IRS worksheets to compute it. For an estimate: 20% of $139,402 is about $27,880. So roughly, Alice could contribute around $27,880 as an employer (LLC) contribution.
Total Contribution: Alice’s total 401(k) contributions for the year would be approximately $22,500 + $27,880 = $50,380. This is under the overall limit of $66,000 for 2025, so it’s allowed. She can deduct the $27,880 employer portion as a business expense on the partnership return, and her $22,500 deferral reduces her personal taxable income.
Why it works: Alice’s entire $150,000 K-1 profit is considered earned income (she actively worked for it). By leveraging her K-1 income in a solo 401(k), she shelters over $50k from current tax. If Alice were in a high-tax bracket, this is a significant tax-deferral and retirement-saving win.
Example 2: S Corporation Owner Attempts a 401(k) Contribution
Bob owns 100% of an S-corporation that operates a consulting business. The S-corp had $100,000 of profit in 2025. Bob, however, chose not to run any payroll for himself, taking the entire $100,000 as a K-1 distribution. Come tax time, Bob wonders if he can contribute some of this $100k into a 401(k) for retirement.
Bob’s W-2 Salary: Unfortunately, Bob gave himself $0 in wages. This means $0 is eligible for 401(k) deferral or match. Despite the S-corp profit, that $100k distribution is not “compensation” in the eyes of the IRS. Bob cannot contribute any portion of that $100,000 to a 401(k) or SEP-IRA. In other words, by not paying himself a salary, Bob has no base for retirement contributions this year (and he may also draw IRS scrutiny for failing to pay himself reasonable compensation).
The Fix (What Bob Should Have Done): Suppose Bob had instead paid himself, say, a $60,000 W-2 salary from the S-corp, and taken the remaining $40,000 as a K-1 distribution. In that case, Bob could contribute to a 401(k). He could defer up to $22,500 of his $60k salary into the 401(k) plan as an employee. Additionally, his S-corp (as employer) could contribute (for example, as a profit-sharing contribution) up to 25% of his salary (that’s $15,000) into the 401(k). That strategy would allow Bob to put away $37,500 pre-tax for retirement. The $40k distribution would still not be touchable for contributions, but at least most of his income would have been leveraged for retirement savings.
Outcome: In the original scenario, Bob’s entire $100k K-1 is just investment income to him with respect to retirement plans — not usable for contributions. By restructuring his income to include a wage, Bob ensures he has “earned income” to work with. This example highlights a critical point: S-corp owners must pay themselves wages if they want to contribute to a 401(k). All K-1 and no W-2 means no retirement contributions (and it’s also a compliance no-no).
Example 3: Passive Investor with K-1 Income (No Earned Income)
Carol is a limited partner in a real estate partnership. She invested money but does not help manage or run the properties. She receives a K-1 showing $50,000 of rental income and gains for 2025. Carol doesn’t have any other job – this K-1 is her only income. Can she contribute to an IRA or 401(k) based on this $50,000?
No Earned Income = No Contributions: Carol’s $50,000 is passive income (in fact, rental income and limited partner income are explicitly not subject to self-employment tax). Because she did not materially participate or provide services, none of that money counts as “compensation” for retirement plans. Carol cannot contribute to a 401(k) (she has no plan through the partnership, and cannot set up a solo 401(k) because she has no self-employment earnings). She also cannot contribute to an IRA, because IRA eligibility also requires earned income (which she lacks in this scenario). Essentially, for retirement saving purposes, Carol’s K-1 might as well not exist – she’ll need other earned income (or a spouse with earned income, to do a spousal IRA) to make retirement contributions.
Alternate Outcome: If Carol were to take on a more active role (say she becomes a general partner or actively manages properties), the nature of her K-1 income could change to earned. Or, if Carol had even a part-time job elsewhere earning $50k of W-2 wages, she could contribute to a 401(k) or IRA from that job and still enjoy her passive K-1 income separately. But as a pure passive investor, her K-1 income alone doesn’t help her fund a retirement plan.
These examples underscore how crucial the nature of the K-1 income is. Active business owners like Alice can fully utilize retirement plans to shelter income. Owners who misclassify their income (like Bob initially) or passive investors like Carol find that K-1 income alone doesn’t open the retirement contribution door.
Hard Evidence: IRS Rules and Tax Code on K-1 & 401(k)
To support the above conclusions, let’s reference the hard evidence in IRS rules and the tax code:
Internal Revenue Code §401(c): This section defines “earned income” for self-employed individuals in the context of retirement plans. It basically says that for a self-employed person (sole proprietor or partner), earned income means the net earnings from self-employment (as defined in §1402) that are taxable as income. Translation: if you’re self-employed, only the income on which you pay self-employment tax counts as compensation for plan contributions. It’s the law’s way of ensuring that only labor income – not investment income – gets funneled into tax-advantaged plans.
Internal Revenue Code §1402(a)(2): This part of the tax code outlines what is not included in “net earnings from self-employment.” Notably, it explicitly excludes the distributive share of income of an S-corporation shareholder. In plain English, if you own an S-corp, the profits passed through to you on a K-1 are not considered self-employment earnings (and you don’t pay SE tax on them). The IRS confirmed this treatment for retirement plans: S-corp K-1 income is not plan-eligible compensation. This is why Bob in Example 2 had no contribution room from his K-1 distribution. The code makes it black-and-white that you can’t call S-corp profits “earned income.”
IRS FAQs and Guidance: The IRS has published FAQs on retirement plans, with one Q&A specifically addressing S-corp shareholders. The question asks: If I’m an S-corp owner who only takes distributions, can I contribute that to a 401(k) or set up a self-employed plan? The IRS answer: No. They state plainly that retirement plan contributions can only be made from compensation (earned income), and S-corp distributions “do not constitute earned income for retirement plan purposes.” They even direct S-corp owners to only use their W-2 wages for 401(k) contributions. This official guidance aligns perfectly with what we’ve explained – it’s not just a matter of interpretation; the IRS openly emphasizes this rule.
IRS Publication 560 (Retirement Plans for Small Business): This publication provides worksheets and formulas for calculating plan contributions for self-employed individuals. It walks through the process of starting with your business profit (from Schedule C or K-1), subtracting the deductible part of self-employment tax, then computing the maximum contributions. The very need for a special worksheet highlights that only self-employment earnings are relevant. If you scour Pub 560, you’ll find examples of a partner making a contribution, and the publication makes no mention of S-corp K-1s – again because S-corp owners are directed to treat themselves as employees instead.
Tax Court Cases: While most people abide by these rules, there have been a few tax court cases and IRS enforcement actions underscoring them. In some cases, S-corp owners who tried to skirt payroll (taking all income as distributions) were hit with reclassification of income to wages (and thus back payroll taxes). If such an owner had contributed to a 401(k) based on those distributions, the contribution would be considered improper. Plan contributions that are impermissible can lead to corrective distributions or even disqualification of the plan in extreme cases. In short, there’s strong legal precedent that you must follow the earned income rule.
ERISA and Plan Definitions: Qualified retirement plans (like a 401(k)) have plan documents that define who is eligible and how contributions are determined. In a plan covering partners, the plan document will use a definition of compensation that includes a partner’s earned income (sometimes called “net earnings” in the plan). Plan administrators specifically rely on the K-1’s self-employment earnings info (often Line 14 on a partnership K-1) to calculate contributions. This mechanistic detail is evidence that the system is built only to count certain K-1 income. If line 14 of a partner’s K-1 is zero (for example, a limited partner has nothing in self-employment earnings), the plan effectively sees that partner’s compensation as $0 for contribution purposes.
All of the above evidence pieces build a consistent picture: only actively earned K-1 income can be funneled into a 401(k). The IRS framework is firmly set against using passive or non-work income as a retirement contribution base. With the legal landscape established, let’s compare various scenarios side by side to deepen our understanding.
Comparing Scenarios: Partnership vs S-Corp vs Passive Income
It can be helpful to compare how different situations stack up in terms of eligibility and benefits. Here we break down a few key scenarios side-by-side:
Partnership vs. S-Corporation – Who Has the Edge for 401(k)s?
If you’re deciding on a business structure (or you have both types of income), it’s useful to see how partnerships and S-corps differ here:
Contribution Eligibility: A general partner in a partnership can use their partnership earnings (K-1) to contribute to a retirement plan, because those earnings are treated as self-employment income. An S-corp owner cannot use S-corp profit distributions for contributions — they must take a salary for that. This means partnerships naturally provide a stream of eligible “compensation” (albeit subject to SE tax), whereas S-corps require an extra step (payroll) to create eligible compensation.
Maximizing Contributions: A self-employed partner can potentially allocate a large portion of profits into a solo 401(k), using the combination of elective deferrals and profit-sharing, up to the annual limit. An S-corp owner is effectively limited by the salary they choose to pay themselves. In practice, S-corp owners sometimes keep their salaries “reasonable” but relatively modest to minimize payroll taxes. The trade-off is that a lower salary caps the amount that can go into a 401(k). For instance, if Bob from Example 2 paid himself $60k, he couldn’t contribute beyond that (his max would be $60k including both deferral and match). If Alice had $150k of self-employment earnings, she had a larger base to potentially hit the full $66k limit. So, partnerships (or sole props) might afford higher contribution ceilings if the business profits are high, since effectively all profit is on the table.
Tax Considerations: S-corp distributions aren’t subject to Social Security/Medicare taxes, which is a tax-saving strategy. But the flip side is those dollars can’t enhance your retirement plan. Partnerships pay SE tax on all profits, which costs more in current tax, but every dollar is “retirement-eligible.” It becomes a strategic question: do you value immediate tax savings (S-corp style) or the ability to maximize sheltered retirement contributions (partnership style)? Many will find a balance (e.g., S-corp owners picking a salary high enough to contribute what they want, and taking the rest as distribution).
Administrative Ease: If you’re a partner, contributing to a 401(k) is a bit of a circular calculation but doesn’t require separate payroll. For an S-corp, running payroll (and possibly a formal 401(k) plan through the company) is an extra layer. Solo 401(k)s for partnerships can be very straightforward; for S-corps, you have to coordinate contributions via payroll deposits.
Verdict: Neither structure is universally better — S-corps save on self-employment tax, but partnerships make retirement contributions simpler and potentially more bountiful. The best structure for you might depend on income level and retirement goals. Just remember: if you have an S-corp, you’ll need a reasonable salary to unlock any 401(k) contributions at all.
Active vs. Passive Income: When K-1 Counts (and When It Doesn’t)
Within partnerships (or LLCs), some owners are active and some are passive. The distinction profoundly affects retirement options:
Active Partner (General Partner or Managing Member): If you materially participate in the business (e.g., managing day-to-day operations, or meeting the IRS tests for material participation), your share of income is deemed active trade/business income. It will typically be subject to self-employment tax (unless the entity elected S-corp tax treatment), which is a telltale sign it’s earned income. Result: You can contribute to a 401(k) or SEP-IRA based on this income, as we’ve detailed. You essentially treat yourself as a self-employed individual for retirement plan purposes.
Passive Partner (Limited Partner or Investor-Only): If you do not materially participate (say you just contributed capital, and maybe get quarterly updates while others run the show), then your K-1 income is passive. By law, limited partners’ income is usually exempt from self-employment tax – it’s considered a return on investment. Result: You cannot use that income for 401(k) contributions. It doesn’t matter if the partnership has a retirement plan for active partners; as a passive investor you wouldn’t have “plan compensation.” And if you’re entirely passive with no other job, you also couldn’t do an IRA. Essentially, passive K-1 income is like rental income or interest – great for cash flow, but not eligible for retirement contributions.
Gray Areas – Special Allocations: Some partnerships have a mix of income types. For example, a partner might receive a guaranteed payment (which is basically like a salary substitute, definitely subject to SE tax) plus a share of profit. Guaranteed payments are earned income by definition. The profit share might include some rental income or investment income that the partnership earned. The IRS requires partners to separate those. So you might have, say, $80k of earned income (from services) and $20k of investment income on the K-1. In that case, you could contribute based on the $80k but not on the $20k. The partnership should clarify this in the K-1 footnotes or in the way items are reported (interest, dividends, etc., get their own boxes on the K-1). The key is that only the portion tied to services rendered counts.
Switching Status: It’s worth noting that passive vs active is not set in stone. If you currently are passive but decide to jump into working in the business, you can effectively turn your K-1 income into earned income (going forward) by meeting the material participation criteria. This could open the door to retirement plan contributions in future years. The reverse is true too – if you go from active to passive (say you step back from operations), your ability to contribute from that income will end.
Solo 401(k) vs. SEP IRA: Best Option for K-1 Income?
Many self-employed folks with K-1 income consider both solo 401(k) and SEP IRA as retirement plan options. Both accept earned income from self-employment, but they have some differences:
Employee Contributions: A solo 401(k) allows you to make an elective deferral (the $22,500/year type contribution) as an “employee” of your own business. A SEP IRA does not; it’s employer-contribution only. Why does this matter? Because with a solo 401(k), even if your self-employed income is modest, you can still sock away a lot. For example, with $30,000 of net self-employment income, you could defer $22,500 into a solo 401(k) (leaving only $7,500 of income!). With a SEP, you’d be limited to 20% of $30k – only $6,000 contribution. So, solo 401(k) is superior for maximizing contributions at lower income levels.
Total Limits: Both plans ultimately cap out at the same total ($66k for 2023, etc., not counting catch-up). If your income is high enough, a SEP can get you to the same place as a solo 401(k). But you need a lot of income to hit the max with a SEP because it’s 20% of net earnings. Roughly, to max out $66k, you’d need around $330k of self-employment income. With a 401(k), you’d need somewhat less because the first $22.5k doesn’t require that 20% math (it’s straight deferral).
Roth Option: Solo 401(k) plans can offer a Roth 401(k) component for the employee deferrals. This means you could choose to contribute after-tax and have tax-free withdrawals in retirement (on that portion). SEP IRAs do not have a Roth option; they are purely pre-tax. If you like the idea of diversifying with some Roth money and you have K-1 earned income, a solo 401(k) gives that flexibility.
Ease of Setup and Maintenance: SEP IRAs are extremely simple to set up and maintain (minimal paperwork, no annual filing in most cases). Solo 401(k)s are a bit more involved: you need to adopt a plan document. Also, once your plan assets exceed $250k, you have to file an annual Form 5500-EZ. It’s not very difficult, but it is an extra compliance step. Some solo 401(k) providers handle a lot of the heavy lifting. But generally, a SEP is simpler, while a solo 401(k) offers more features.
When Each Is Used: If someone has very high self-employment income and wants to stash the max, both plans work. But if someone starts a side business late in the year after already maxing a day-job 401(k), a SEP might be considered because they couldn’t defer more anyway (they’ve used up the 401(k) deferral at their job). On the other hand, if one’s self-employed K-1 income is their main income source, a solo 401(k) often allows greater contributions. Many financial advisors lean toward solo 401(k) for the self-employed because of the deferral and Roth features. The key in both cases: your income must be earned. They equally disallow passive K-1 income.
Mixing K-1 with a Day Job: Combining Retirement Plans
It’s increasingly common to have multiple income streams – say you work for a company and also have a side business that issues you a K-1. How do contributions work in such cases?
Single Employee Deferral Limit: No matter how many jobs or businesses you have, you as an individual have one limit for elective deferrals to 401(k/403b plans in a year. For example, if you contribute $15,000 from your day job’s paycheck to their 401(k), you have $7,500 of room left for elective deferrals that year (to reach $22,500). If you then also have a solo 401(k) for your self-employment, you could defer that remaining $7,500 from your self-employment earnings. Once you hit $22,500 total, you’re done with deferrals across all plans. This is a critical point – people sometimes mistakenly think each plan gives a separate deferral limit. The IRS is clear it’s per person, not per plan.
Employer Contributions Don’t Interfere: The good news is that employer contributions are separate for each unrelated employer. If you max out your deferral at work and your employer matches, that match doesn’t affect what your self-employed plan can do. Your solo 401(k) could still do a full 20% profit-sharing contribution from your K-1 income on top. Also, the $66,000 overall limit is technically per unrelated employer. That means you could potentially get $66k at your day job (between your deferral, their match, etc.) and another up-to-$66k in your solo 401(k) (between your remaining deferral room and profit share), provided your self-employment income supports it. This scenario might be rare, but, for instance, a high-earning professional who also has a lucrative side consulting business could maximize both. The main overlap to watch is just the deferral.
Example: Let’s say Dan works at Big Corp and maxes his $22,500 401(k) deferral there (Big Corp also contributes a $5k match). Dan also has a small business on the side with $50,000 of net self-employment income. Dan cannot defer any salary into his solo 401(k) (he’s used up the $22.5k), but he can still contribute 20% of $50k = $10,000 as an employer contribution from his side business. That $10k will be a deductible business expense on his Schedule C or partnership, and it will go into his solo 401(k) account. Dan ends up saving a total of $22.5k + $5k + $10k = $37.5k for retirement this year, with $10k of it coming from his K-1 income. This combined approach is fully allowed.
Plan Setup: Note that Dan needed to have a separate plan for the side business (Big Corp’s 401(k) won’t accept outside earnings – you can’t just throw extra money into your employer’s plan beyond your paycheck). So having a side self-employed retirement plan is key. But coordinating the limits is equally key so you don’t over-contribute.
As you can see, multiple scenarios can be navigated successfully if you keep the rules straight. Now that we’ve covered federal law and various scenarios, let’s address how state laws come into play, which is especially relevant for K-1 earners looking at their tax picture holistically.
State-by-State Nuances: 401(k) Contributions and K-1 Income in Every State
Federal law governs whether K-1 income qualifies for 401(k) contributions (as we’ve discussed). However, state tax laws determine how those contributions are treated on your state income tax return. Most states follow the federal treatment (meaning they don’t tax your 401(k) contributions and will tax the distributions later), but a few have quirks. Below is a state-by-state breakdown of how each state handles 401(k) contributions, especially for self-employed individuals using K-1 income:
| State | State Tax Treatment of 401(k) Contributions (K-1 Related) |
|---|---|
| Alabama | Follows federal rules. 401(k) contributions (including those from self-employment K-1 earnings) are deductible from Alabama income. Distributions in retirement are taxed as income. (State AGI is used for limits, but no special restrictions.) |
| Alaska | No state income tax. There is no state tax impact whether you contribute from K-1 income or not. (Alaska doesn’t tax personal income, so contributions and distributions are irrelevant to state tax.) |
| Arizona | Same as federal. Pre-tax 401(k) contributions are deductible in computing Arizona taxable income. The state fully honors the federal rules for contributions made from self-employment earnings. |
| Arkansas | Generally follows federal for residents. Arkansas residents can deduct 401(k) contributions (including solo 401(k) contributions from K-1 income). Non-residents cannot deduct retirement contributions against Arkansas-source income. (Part-year residents must prorate the deduction.) |
| California | Conforms to federal rules. California allows deductions for qualified retirement plan contributions. If you contribute pre-tax to a 401(k) (whether via W-2 or self-employed K-1 earnings), it’s deductible on your California return. Note: California often conforms to federal definitions but doesn’t automatically adopt every future change — as of now it aligns on 401(k) contribution treatment. |
| Colorado | Follows federal. Colorado starts with federal taxable income, so 401(k) contributions are excluded from state taxation. No special adjustments; contributions from K-1 self-employment reduce your CO income just like federal. |
| Connecticut | Same as federal. Connecticut uses federal AGI as a starting point, meaning any allowable contribution to a qualified plan (401(k)) is not part of CT taxable income. In short, CT gives the tax deferral on contributions. |
| Delaware | Follows federal guidelines. Delaware permits the same deductions for 401(k) contributions as federal. Self-employed retirement contributions are deductible in arriving at DE taxable income. |
| Florida | No state income tax. Florida does not tax personal income, so 401(k) contributions have no state tax implications. (All your income, K-1 or otherwise, is free of state income tax in FL.) |
| Georgia | Same as federal. Georgia conforms to the federal treatment of retirement contributions, so any pre-tax 401(k) amounts (including self-employed plan contributions) are excluded from GA taxable income. |
| Hawaii | Follows federal for contributions. Hawaii allows deductions for 401(k) deferrals and contributions (following federal AGI). Hawaii does have some unique exclusions for certain pension income distributions, but for contributions, you get the tax break upfront like federal. |
| Idaho | Same as federal. Idaho’s tax code aligns with federal rules on retirement contributions, so your Idaho taxable income is reduced by any 401(k) contributions from your K-1 earnings (just as on your federal). |
| Illinois | Follows federal. Illinois uses federal AGI as the base and does not add back 401(k) contributions. Thus, contributions from self-employment income are fully deductible for IL income tax. |
| Indiana | Same as federal. Indiana starts with federal AGI, so it respects the federal deduction for 401(k) contributions. No special add-backs for retirement contributions; what’s deductible federally is deductible in IN. |
| Iowa | Follows federal. Iowa aligns with federal treatment on qualified plan contributions. Your taxable income in IA will already exclude the 401(k) contributions you made from K-1 income. |
| Kansas | Same as federal for residents. Kansas allows deduction of retirement contributions in full for residents. Nonresidents must apportion the federal deduction to Kansas based on the percentage of income earned in Kansas. (So if only part of your self-employment income is KS-source, you only get that portion of the deduction.) |
| Kentucky | Follows federal, with one nuance. KY generally allows 401(k) deductions, but it limits them to your Kentucky-sourced earned income. In practical terms, as long as your K-1 income is Kentucky-earned (or you’re a full-year resident), you get the full deduction just like federal. |
| Louisiana | Same as federal. Louisiana conforms to federal definitions of gross income, so 401(k) contributions (including self-employed) are deductible for LA state tax. No special disallowances. |
| Maine | Follows federal. Maine uses federal taxable income as a baseline, thereby incorporating 401(k) contribution deductions. Exception: Maine has its own treatment for public retirement system contributions, but for private 401(k) plans, federal treatment holds. |
| Maryland | Same as federal. Maryland fully allows the deduction for contributions to retirement plans. If you contributed pre-tax to a solo 401(k) from K-1 income, Maryland will not tax that contribution. |
| Massachusetts | Partially conforms. Massachusetts has a unique rule: It does not allow deductions for self-employed retirement plan contributions (often termed “Keogh” plans) for state tax. However, contributions made as an employee to a 401(k) are not taxed by MA. Practically, this means if you’re a sole proprietor or partner contributing to your solo 401(k), Massachusetts will tax you on that contribution now (but then won’t tax it again at withdrawal). MA basically treats those contributions as after-tax for state purposes. In contrast, if you’re an S-corp owner paying yourself W-2 wages, your 401(k) deferrals from those wages are excluded from MA income (since they show up as a reduction in your W-2 box 16, which MA accepts for 401(k)). Summary for MA: 401(k) contributions based on self-employed K-1 income are taxed in the contribution year (with distributions later being partly tax-free as return of previously-taxed contributions). |
| Michigan | Follows federal. Michigan conforms to federal AGI for retirement contributions. Your 401(k) contributions reduce federal AGI and therefore reduce Michigan taxable income equally. |
| Minnesota | Same as federal. Minnesota allows the full deduction for qualified plan contributions; there are no Minnesota-specific add-backs for 401(k) deferrals or SEP/Solo 401(k) contributions. |
| Mississippi | Follows federal. Mississippi honors deductions for contributions to retirement plans, matching the federal treatment. (MS has some generous exclusions for retirement income after age 59½, but that’s on the distribution side.) |
| Missouri | Same as federal. Missouri uses federal taxable income as a starting point, which means all your 401(k) or SEP contributions from K-1 earnings are deducted just like on federal. |
| Montana | Follows federal. Montana aligns with federal rules on retirement contributions. You’ll get the state tax deduction for any contributions made from your self-employment income. |
| Nebraska | Same as federal. Nebraska’s taxable income calculations incorporate the federal adjustments for retirement plan contributions, so contributions from K-1 income are deductible. |
| Nevada | No state income tax. Nevada imposes no personal income tax, so contributions and distributions have no bearing on state taxes. |
| New Hampshire | No broad income tax. New Hampshire doesn’t tax wage or business income (only interest/dividends over a threshold). So for earned income like K-1 business profits, there’s effectively no state income tax. 401(k) contributions are a non-issue for NH tax purposes. |
| New Jersey | Partially conforms. New Jersey’s tax code does not allow a deduction for most retirement plan contributions by the self-employed. In NJ, contributions to IRAs, SEP plans, 403(b), 457, etc. are generally not deductible – they’re included in state gross income. However, New Jersey does allow 401(k) salary deferrals to be excluded from wages. This is a notable exception. So, if you are a self-employed individual with a solo 401(k), how does NJ treat it? If it’s structured as a 401(k) (even as a single-participant plan), NJ will treat those contributions like any other 401(k) deferral – excluded from state income. But if instead you used a SEP-IRA or SIMPLE IRA, NJ would not allow that deduction. Summary for NJ: Use a 401(k) plan format for your self-employed retirement savings – New Jersey will give you the tax break. If you used a “Keogh” or SEP, NJ taxes the contributions (with distributions later being tax-free to the extent of previously-taxed contributions). |
| New Mexico | Follows federal. New Mexico conforms to federal treatment of retirement contributions, so they are deductible from NM income. (NM does not tax that income up front; distributions will be taxed by NM except for certain exemptions.) |
| New York | Same as federal. New York State follows federal rules for 401(k) contributions – they are excluded from NY taxable income. NYC local tax also uses federal income as base, so similarly 401(k) contributions are not taxed by the city. |
| North Carolina | Follows federal. North Carolina aligns with federal definitions of income, thus 401(k) contributions from self-employment reduce NC taxable income as they do federally. |
| North Dakota | Same as federal. North Dakota’s tax calculation starts with federal taxable income, which means your pre-tax contributions are honored for ND tax (deductible). |
| Ohio | Follows federal. Ohio uses federal adjusted gross income, so any deduction allowed federally for a 401(k) contribution carries over to Ohio. No special adjustments in OH for these contributions. |
| Oklahoma | Same as federal. Oklahoma conforms to federal income definitions, allowing deduction of retirement plan contributions from taxable income. (No state-specific disallowance.) |
| Oregon | Follows federal. Oregon generally allows the same deductions as federal for 401(k)/SEP contributions. (Oregon does tax some fringe benefits differently, but retirement contributions follow federal treatment.) |
| Pennsylvania | Does not allow deduction. Pennsylvania is unique: it does not permit a deduction for contributions to 401(k)s or IRAs in computing state income. Pennsylvania’s income tax starts with gross compensation and does not recognize deferred salary as non-taxable. In practice: If you contribute $10,000 to a 401(k), for federal tax your W-2 shows $10k less wages – but for PA, you must add that $10k back to taxable compensation. So PA taxes your contributions now. The flip side: Pennsylvania exempts retirement distributions (after a qualifying age) from tax. So you pay tax on contributions, but won’t pay on the withdrawals (it’s essentially a front-loaded tax rather than back-loaded). For someone using K-1 self-employed income: if you contribute to a solo 401(k), you’ll still owe PA tax on that contributed amount in the year of contribution. Consider it like making contributions with after-tax dollars as far as PA is concerned. This applies broadly – PA doesn’t distinguish S-corp vs partnership here; it simply taxes all current earnings (including ones you deferred federally). |
| Rhode Island | Follows federal. Rhode Island uses federal AGI, so retirement contributions are deducted from RI income if deducted federally. No unique provisions for K-1 contributions – they’re treated normally. |
| South Carolina | Same as federal. South Carolina conforms to the federal treatment of 401(k)/self-employed plan contributions (deductible now). Additionally, SC offers some retirement income deductions for those over 65 on the distribution end, but that’s outside the contribution phase. |
| South Dakota | No state income tax. South Dakota has no personal income tax, so there’s no concern about state deductibility or taxation of your contributions. |
| Tennessee | No state income tax. Tennessee previously had the Hall Tax (on investment income) but no tax on wages/business income. As of now, TN has eliminated even that tax, so individuals face no state income tax. Thus, 401(k) contributions and K-1 income are not taxed at the state level at all. |
| Texas | No state income tax. Texas does not tax personal income, so all of your earnings (and any retirement contributions) are free from state tax. |
| Utah | Follows federal. Utah’s tax system starts with federal income, meaning 401(k) contributions are deducted. Utah also offers some tax credits for retirement income at withdrawal, but during contribution years, federal conformity rules. |
| Vermont | Same as federal. Vermont uses federal taxable income, so pre-tax contributions to 401(k)s (including those from self-employed earnings) are honored as deductions. |
| Virginia | Follows federal. Virginia conforms to federal tax treatment for retirement contributions; your VA taxable income is reduced by any 401(k) contributions just as on your federal return. |
| Washington | No state income tax. Washington State has no personal income tax, so there’s no effect at the state level from making retirement contributions. |
| West Virginia | Same as federal. West Virginia allows the deduction for retirement plan contributions, mirroring federal law. (WV starts with federal AGI). |
| Wisconsin | Follows federal. Wisconsin generally honors 401(k) and SEP contributions deductions. No add-back in WI income calculations for those, so contributions from K-1 self-employment are tax-deferred in Wisconsin just like federal. |
| Wyoming | No state income tax. Wyoming residents enjoy no state income tax, so retirement contributions aren’t needed for state tax relief (and they won’t be taxed by the state on distribution either). |
As shown above, the vast majority of states stick with the federal approach – which is good news, as it means your 401(k) contributions from eligible K-1 income usually get a tax break at both federal and state levels. The big exceptions to note are Pennsylvania (no deduction) and Massachusetts (no deduction for self-employed plans), and to some extent New Jersey (which denies most but specifically allows 401(k) form plans). If you live in one of these states, factor that into your planning: you might end up contributing on a state “after-tax” basis. This could make Roth contributions more appealing at the margin, or at least you should be aware you’re paying some tax now for a tax-free withdrawal later (at the state level).
Finally, now that we’ve covered everything from definitions to laws to state treatment, let’s distill answers to some frequently asked questions around this topic:
FAQ: K-1 Income and 401(k) Contributions
Q: Can I contribute to a solo 401(k) using only K-1 partnership income?
A: Yes. If the K-1 income is from an active partnership (self-employment earnings), it counts as compensation and you can contribute it to a solo 401(k). Passive K-1 income doesn’t qualify.
Q: Does K-1 income from an S corporation count for 401(k) contributions?
A: No. S-corp K-1 distributions are not “earned income” for retirement plan purposes. Only the W-2 salary you draw from the S-corp can be used as the basis for 401(k) contributions.
Q: Can a limited partner use K-1 income to fund a 401(k)?
A: No. A limited partner’s K-1 income is generally passive, not earned. Since it’s not payment for services, it cannot be used to make IRA or 401(k) contributions.
Q: If K-1 income is my only income, can I contribute to any retirement account?
A: Yes, but only if that K-1 income is from self-employment (active business work). If all your K-1 income is passive (no earned income at all), no, you cannot contribute to a 401(k) or IRA.
Q: Do I need to pay self-employment tax on K-1 income to contribute to a plan?
A: Yes. In practice, if your K-1 income is subject to self-employment tax, that means it’s earned income eligible for plan contributions. Income not subject to SE tax is usually not eligible.
Q: Can I contribute K-1 income from a partnership to my corporate 401(k) at my day job?
A: No. Contributions to an employer’s 401(k) can only come from wages from that employer. K-1 income from a separate business can’t be contributed into your day job’s 401(k) plan.
Q: Do some states tax my 401(k) contributions from K-1 income now?
A: Yes. A few states (e.g. Pennsylvania, Massachusetts) do not exempt self-employed 401(k) contributions from current tax, meaning you’ll pay state tax on the contributions. Most states follow federal and don’t tax contributions upfront.
Q: Can I have both a work 401(k) and a solo 401(k) for my K-1 income?
A: Yes. You can maintain a solo 401(k) for your self-employment in addition to a day job 401(k). Just remember the $22,500 employee deferral limit is shared across plans (but you can still do employer contributions in the solo 401k separately).