How Does an LLC Member Contribute to a 401(k)?

An LLC member can establish a 401(k) plan, offering a powerful avenue for retirement savings. While traditional 401(k)s are typically associated with W-2 employment, an LLC’s structure allows members to access similar, flexible retirement vehicles. Understanding how your LLC income is characterized and the available plan options is the first step toward maximizing contributions. This approach enables substantial tax-advantaged savings, aligning with business owners’ financial goals.

Understanding LLC Member Income for 401(k) Eligibility

An LLC’s income treatment fundamentally shapes how its members can contribute to a 401(k). By default, the IRS often treats single-member LLCs as sole proprietorships and multi-member LLCs as partnerships for tax purposes. This means the business’s profits and losses pass through directly to the owner’s personal tax return.

The income relevant for 401(k) contributions is “net earnings from self-employment.” For a single-member LLC, this amount is reported on Schedule C of the owner’s Form 1040. For a multi-member LLC, each member’s share of income is reported on Schedule K-1, which flows to their individual tax return.

This self-employment income forms the basis for calculating eligible retirement plan contributions, rather than a traditional W-2 salary. It represents the business’s profit after deducting all ordinary and necessary business expenses. If an LLC has elected to be taxed as an S-Corporation or C-Corporation, 401(k) eligibility is based on W-2 wages paid to the owner, changing the calculation methodology. Accurate income reporting directly impacts the maximum allowable contributions.

Choosing the Right 401(k) Plan for Your LLC

Selecting the appropriate 401(k) plan for your LLC depends primarily on whether your business has common-law employees other than yourself or your spouse. For many LLC owners, especially those operating as a single-member LLC or a multi-member LLC where only owners and their spouses work, a Solo 401(k) plan is often the most suitable option. This plan, also known as an Individual 401(k) or Uni-k, is designed for self-employed individuals and business owners without full-time employees.

A key advantage of the Solo 401(k) is its ability to allow contributions in two capacities: as an employee and as an employer. This dual contribution feature can lead to higher contribution limits compared to other self-employed retirement plans like SEP IRAs. The plan can also offer loan provisions, allowing participants to borrow against their account balance.

If your LLC employs common-law employees who meet eligibility criteria, establishing a traditional employer-sponsored 401(k) plan becomes necessary. LLC owners would participate as employees alongside their staff. These plans involve more comprehensive administrative requirements and are subject to non-discrimination testing to ensure fair benefits for all eligible employees. While a Solo 401(k) offers benefits for owner-only businesses, a traditional 401(k) ensures compliance and retirement savings opportunities for larger LLCs with employees.

Calculating Your 401(k) Contributions as an LLC Member

Calculating 401(k) contributions as an LLC member involves two distinct components: employee deferrals and employer profit-sharing contributions. This calculation is unique for self-employed individuals because their “compensation” for retirement plan purposes is their net earnings from self-employment, adjusted for certain deductions. IRS limits, subject to annual adjustments, determine the maximum amount you can contribute.

As an employee of your LLC, you can defer a portion of your earned income into the 401(k) plan. For 2025, the maximum employee deferral is $23,500. If you are age 50 or older, you can make an additional catch-up contribution. For 2025, this catch-up contribution is $7,500 for those aged 50-59 or 64 and over, bringing the total employee deferral to $31,000. A higher catch-up contribution of $11,250 is available for those aged 60-63, allowing for a total employee deferral of $34,750 in 2025.

The employer profit-sharing contribution is more complex for self-employed individuals. This contribution is generally limited to 25% of your “compensation” for retirement plan purposes. For LLC members taxed as sole proprietors or partners, “compensation” is net earnings from self-employment reduced by one-half of your self-employment taxes and the deductible portion of your own retirement plan contributions. This creates a circular calculation, effectively limiting the employer contribution to approximately 20% of your net self-employment earnings before these adjustments. The maximum compensation considered for contribution calculations is $350,000 in 2025.

The total combined contribution from both employee deferrals and employer profit-sharing cannot exceed a specified overall limit. For 2025, this combined limit is $70,000 for individuals under age 50. If you are age 50 or older, the overall limit increases to $77,500, incorporating the catch-up contribution. For those aged 60-63, the total combined limit can reach $81,250. Perform this calculation accurately to maximize your savings while remaining compliant with IRS rules.

Setting Up and Making Contributions to Your LLC Member 401(k)

Establishing a Solo 401(k) for your LLC involves several practical steps to ensure compliance and proper administration. First, choose a plan provider, such as a financial institution or specialized retirement plan administrator. This provider will supply the necessary plan documents, outlining the terms and conditions of your 401(k) plan in accordance with IRS regulations.

Next, obtain an Employer Identification Number (EIN) specifically for your Solo 401(k) trust. While your business may have an EIN, the 401(k) plan, as a separate retirement trust, requires its own EIN for tax filings and to open a bank or brokerage account. Some financial institutions might allow initial setup without a separate EIN, but obtaining one ensures clear separation and future compliance. With the plan documents and EIN, establish the trust or custodial account that will hold the plan assets.

Making contributions to your Solo 401(k) involves transferring funds into this newly established account. Employee deferrals can be made throughout the tax year. Employer profit-sharing contributions can be made up to the tax filing deadline for the tax year the income was earned, including any extensions. Maintain meticulous records of all contributions made to the plan. This documentation supports your tax deductions and ensures accurate reporting to the IRS.

An annual reporting requirement exists for Solo 401(k) plans. If your plan’s assets exceed $250,000 at the end of the plan year, you must file IRS Form 5500-EZ. This informational return provides the IRS with details about your plan’s financial status. The due date for Form 5500-EZ is July 31st of the year following the plan year. Electronic filing through the EFAST2 system is required if you file ten or more returns of any type with the IRS during the calendar year.