S corporation owners should coordinate retirement planning with payroll. A shareholder distribution is not earned income for retirement-plan purposes. An owner-employee generally bases applicable salary deferrals on eligible W-2 compensation under the plan rules.

A large distribution therefore does not, by itself, support a large retirement contribution. Employer contributions, deferrals, other employment, annual limits, and plan terms must be considered together. Eligible employees may also have to be included.

Before the final payroll of the year, provide the preparer with year-to-date wages, contributions already made, plan documents, and information about other workplace plans. Choosing a contribution amount without checking the compensation base can create a correction problem instead of a tax benefit.

Your next steps

• Reconcile owner wages and contributions.
• Disclose participation in other employer plans.
• Confirm plan deadlines and employee coverage.

General education, not individualized tax or legal advice. Illustrations use stated assumptions and do not promise a refund or tax saving.