How Guaranteed Payments Affect Partner 401k Contributions

A partner is an individual with an ownership stake in a business partnership who is actively involved in its management and operations. Many businesses offer a 401(k) plan, a retirement account with tax advantages. Partners can participate in these plans, but their involvement is governed by different rules than for traditional employees.

A guaranteed payment is a payment to a partner for services or capital, paid regardless of the partnership’s profitability. These payments are similar to a salary. Understanding how this income integrates with other earnings is necessary for determining how a partner can contribute to a 401(k).

Defining Partner Compensation for 401(k) Purposes

For retirement plan purposes, partners are treated as self-employed individuals, not employees. This distinction means they do not receive a W-2 wage statement. The basis for their 401(k) contributions is their “net earnings from self-employment,” which is derived from the work they perform for the partnership.

A partner’s net earnings from self-employment have two components: guaranteed payments and the partner’s distributive share of ordinary business income. Guaranteed payments are fixed amounts for services, paid regardless of partnership income. The distributive share is the partner’s portion of profits from activities in which they materially participate.

Both guaranteed payments and the distributive share of income are combined to establish the partner’s total earned income. This combined figure is the starting point for 401(k) contribution calculations. Income not related to the partner’s material participation, such as certain portfolio or rental income, is not included.

The partnership is considered the employer and sponsors the plan, while the partner participates with a different compensation structure.

Calculating Maximum Partner 401(k) Contributions

Calculating a partner’s maximum 401(k) contribution begins with their total earned income from guaranteed payments and their share of profits. This total is multiplied by 92.35% to determine the amount subject to self-employment tax.

A deduction for one-half of the partner’s self-employment (SE) tax is then subtracted from their total earned income. This step creates parity with W-2 employees, whose employers pay a portion of FICA taxes. The resulting figure is “plan compensation,” which is used to determine contribution limits.

With the plan compensation amount established, a partner can determine their two contribution components. The first is the “employee” contribution, known as an elective deferral. For 2025, this is limited to $23,500, with an additional $7,500 catch-up contribution allowed for those age 50 and over.

The second is the “employer” nonelective contribution, which is limited to 25% of the partner’s plan compensation.

Consider a partner under age 50 with $150,000 in guaranteed payments and $50,000 in distributive share income, for a total of $200,000 in earned income. First, the amount subject to self-employment tax is calculated by multiplying the total earnings by 92.35%, resulting in $184,700. The SE tax consists of a 12.4% Social Security tax on earnings up to the annual limit ($176,100 for 2025) and a 2.9% Medicare tax on all net earnings.

After calculating the total SE tax of $27,192.70, one-half of it ($13,596.35) is deducted from the $200,000 of earned income. This results in a compensation base of $186,403.65. The employer contribution calculation is complex because the contribution itself reduces this base.

To simplify, the IRS allows using a reduced rate. The 25% employer contribution limit is equivalent to 20% of net earnings before the contribution is subtracted. Using this rate, the maximum employer contribution is $37,280.73 (20% of $186,403.65).

The partner can also make their full employee elective deferral of $23,500. The total contribution would be $60,780.73. This amount is below the overall 2025 limit of $70,000 for total additions to a defined contribution plan.

Tax Reporting and Contribution Mechanics

The partnership deducts contributions for its common-law employees on its Form 1065 business tax return. Contributions for partners are handled differently and are not deducted by the partnership on Form 1065.

The total retirement contribution for a partner is reported on Schedule K-1 (Form 1065) in Box 13 with code ‘R’. The partner uses this to claim a personal income tax deduction on Schedule 1 of their Form 1040. This process ensures the partner, not the partnership, receives the tax benefit.

A partner’s elective deferrals, the “employee” portion of their savings, must be designated by the end of the calendar year. The actual cash contribution for these deferrals must then be deposited into the 401(k) plan.

The “employer” nonelective contribution has a flexible funding deadline, up to the due date of the partnership’s Form 1065 tax return, including extensions. This allows time to finalize income calculations before committing to the contribution. Funds are transferred from the partnership’s business account to the 401(k) plan’s custodian.