# S corp reasonable salary and 401(k) limits for 2027

By James Ustby, CFP®, APMA®. Published 2026-10-22. Canonical URL: https://jamesustby.com/articles/s-corp-reasonable-salary-401k-limits

> The 2027 Social Security wage base is $192,300. Here is how it and the projected 401(k) limits shape an S corporation owner's salary, with the math.

## Key takeaways

- On October 14, 2026, the Social Security Administration set the 2027 wage base at $192,300, up from $184,500, and on October 15 Marsh published final projections of the 2027 retirement plan limits.
- An S corporation must pay a shareholder who works in the business reasonable compensation before taking distributions. The salary has to fit the work, not the tax math.
- In a solo 401(k), the employer contribution is limited to 25 percent of W-2 pay, so salary sets how much room the plan has.
- In our hypothetical, a projected 2027 salary of about $198,000 is the point where a 52 year old owner could reach the projected $75,000 overall limit, just above the new wage base.
- These 2027 plan limits are forecasts until the IRS publishes its notice. The 2026 limits and the 2027 wage base are final.

## The short answer

An S corporation owner who works in the business has to take a reasonable salary for that work before taking distributions, and that salary also sets how much the company can put into the owner's 401(k). This month the 2027 inputs arrived: the Social Security Administration set the 2027 wage base at $192,300 on October 14, and on October 15 Marsh projected an overall 2027 defined contribution limit of $75,000. In a solo 401(k), the employer piece is capped at 25 percent of W-2 pay, so salary and plan room move together.

## What changed this week for S corporation owners?

Two sets of numbers that drive an owner's payroll decision for 2027 came out within a day of each other.

On October 14, 2026, the SSA announced its 2027 figures. The Social Security wage base, the most wages that the 6.2 percent Social Security tax applies to, rises to $192,300 from $184,500. Medicare tax of 1.45 percent each for employee and employer still has no cap, and the additional 0.9 percent Medicare tax still starts at $200,000 of earned income for a single filer and $250,000 for a married couple filing jointly.

On October 15, Marsh updated its projections of the 2027 retirement plan limits with the final September inflation data. The IRS has not published the official 2027 limits yet. It usually does so in late October or November.

| Number | 2026 (final) | 2027 |
|---|---|---|
| Social Security wage base | $184,500 | $192,300 (SSA, final) |
| Employee elective deferral | $24,500 | $25,500 (projected) |
| Catch-up, age 50 and over | $8,000 | $8,500 (projected) |
| Catch-up, ages 60 to 63 | $11,250 | $11,750 (projected) |
| Overall defined contribution limit | $72,000 | $75,000 (projected) |
| Compensation that can be counted | $360,000 | $375,000 (projected) |
| Prior year wages that trigger Roth catch-up | $150,000 | $155,000 (projected) |

The 2026 plan limits come from IRS Notice 2025-67. The 2027 plan limits are Marsh's projections, so treat them as estimates until the IRS notice is out.

## What counts as a reasonable salary?

The IRS is direct about the rule. An S corporation must pay reasonable compensation to a shareholder-employee in return for services before non-wage distributions may be made, and the IRS can reclassify distributions as wages subject to employment taxes. Its guidance points to where the company's gross receipts come from: the owner's own services, the work of other employees, or capital and equipment.

The factors the IRS lists include:

- Training and experience
- Duties and responsibilities
- Time and effort devoted to the business
- Dividend history
- Payments to non-shareholder employees
- Timing and manner of paying bonuses to key people
- What comparable businesses pay for similar services
- Compensation agreements and the use of a formula

That list is why retirement plan math cannot pick the salary on its own. The salary has to be defensible for the work the owner does. Plan room is a consequence of that number, not a reason to set it.

## How does salary set the 401(k) limit for an S corporation owner?

For an S corporation owner, compensation for plan purposes is W-2 pay from the company. Distributions on the K-1 do not count. The IRS describes a solo 401(k) owner as wearing two hats:

- **As the employee**, the owner can defer up to 100 percent of compensation, up to the elective deferral limit.
- **As the employer**, the company can add a nonelective contribution of up to 25 percent of compensation as the plan defines it.
- **Together**, the two cannot pass the overall limit. Catch-up contributions for owners 50 and over sit on top.

That creates a simple threshold. To reach the overall limit with a full deferral, the employer piece has to cover the gap, and the employer piece can only be 25 percent of salary. For 2026, the gap is $72,000 minus $24,500, or $47,500, which takes $190,000 of salary. For 2027, using the projected limits, the gap is $75,000 minus $25,500, or $49,500, which takes $198,000 of salary. Both thresholds sit just above that year's Social Security wage base.

## What does the math look like for one owner? (hypothetical example)

Meet Marcus, a hypothetical example. He is 52, the only employee of his S corporation, and has no 401(k) at another job. His company has enough profit to pay any of the salaries below, and for this example each one is assumed to be reasonable for his role. The payroll tax figures combine the employee and employer halves, using the final 2027 SSA wage base. The plan figures use the projected 2027 limits.

| Marcus, 2027 | Salary $100,000 | Salary $198,000 | Salary $300,000 |
|---|---|---|---|
| Elective deferral | $25,500 | $25,500 | $25,500 |
| Employer contribution (up to 25% of salary) | $25,000 | $49,500 | $49,500 |
| Catch-up, age 50 and over | $8,500 | $8,500 | $8,500 |
| Total that could go in the plan | $59,000 | $83,500 | $83,500 |
| Social Security tax (12.4% up to $192,300) | $12,400.00 | $23,845.20 | $23,845.20 |
| Medicare tax (2.9%, no cap) | $2,900.00 | $5,742.00 | $8,700.00 |
| Payroll tax, both halves | $15,300.00 | $29,587.20 | $32,545.20 |

A few things stand out in this example.

1. **The jump from $100,000 to $198,000** adds $24,500 of plan room and $14,287.20 of combined payroll tax. Whether that trade is worth it depends on his cash flow, his tax brackets and his reasonable compensation analysis, which this example does not cover.
2. **Above $198,000**, salary adds no plan room in this example, because Marcus has already reached the projected overall limit. Each extra dollar of salary only adds Medicare tax, plus the additional 0.9 percent Medicare tax on earned income above $200,000 if he files single.
3. **Above the wage base**, the 12.4 percent Social Security tax stops. That is why the payroll tax gap between $198,000 and $300,000 is only the Medicare piece.

If Marcus were 61 instead of 52, his projected 2027 catch-up would be $11,750 instead of $8,500. The salary threshold for reaching the overall limit would not change, because catch-up contributions sit outside it. The free [owner retirement plan calculator](https://jamesustby.com/owner-retirement-plan-calculator) lets you run your own salary and age through the 2026 limits.

## Does the Roth catch-up rule depend on salary?

Yes. Starting in 2026, an employee whose prior year Social Security wages from the employer sponsoring the plan were more than $150,000 generally must make catch-up contributions as Roth, and the plan must offer a Roth option for those contributions to be made at all. Marsh projects that the trigger for 2027 will be $155,000 of 2026 wages.

In the hypothetical, if Marcus paid himself $100,000 in 2026, his 2027 catch-up could generally still be pre-tax. At $198,000 or $300,000 of 2026 wages, it would generally have to be Roth. Our [solo 401(k) limits for 2027 article](https://jamesustby.com/articles/solo-401k-limits-2027-forecast) walks through the rule in more detail. The rule is new, so the plan document and your tax professional should confirm how it applies to you.

## What should an owner review before January payroll?

1. **A written basis for the salary.** Comparable pay data and a description of duties can support the number if it is ever questioned.
2. **Payroll elections.** Elective deferrals come out of payroll during the year, so a change for 2027 has to be set before January paychecks.
3. **Employer contribution timing.** Employer contributions for a year can generally be made up to the company's tax filing deadline, including extensions. IRS Publication 560 covers the rules.
4. **A bigger plan, if the numbers call for it.** Owners who want to save more than a 401(k) allows sometimes look at a cash balance plan, where salary also drives the math. Our [cash balance plan article](https://jamesustby.com/articles/cash-balance-plan-owner-contribution) shows how that works.
5. **A sale on the horizon.** Salary history can matter to a buyer, because a buyer may restate owner pay to market rates when it measures earnings. The [exit planning timeline](https://jamesustby.com/articles/exit-planning-business-owner-start) covers when those decisions usually start.

North Carolina note: North Carolina's individual income tax is currently a single flat rate, and S corporation income generally reaches the owner's state return whether it is paid as salary or distributed. For most owners here, the salary split mainly changes federal payroll taxes and retirement plan room.

## The bottom line

The 2027 Social Security wage base is final at $192,300, and the projected 2027 plan limits put the overall solo 401(k) limit at $75,000. For an S corporation owner, the salary has to be reasonable for the work first. Within a reasonable range, salary decides how much room the 401(k) has, and in our hypothetical a salary of about $198,000 is where a full deferral plus the 25 percent employer piece reaches the projected overall limit. Salary above that point added no plan room in the example, only Medicare tax. The official IRS 2027 limits should arrive within weeks and could change these figures slightly.

Do you know how your current salary was set, and whether it would hold up next to what comparable businesses pay for the work you do?

## Next steps if you own a business

- **Get the next one by email.** [The Liquidity Letter](#ll-foot-title) covers exits, cash and taxes for owners with millions on the line. Sign up in the box at the bottom of this page.
- **Run your own numbers.** The free [owner retirement plan calculator](https://jamesustby.com/owner-retirement-plan-calculator) shows how salary and age change what a plan could hold under the 2026 limits.
- **Talk it through.** If you want to see how salary, a plan and your exit timeline could fit together, [book a free call](https://oncehub.com/jamesustby).

## Questions people ask next

### What is reasonable compensation for an S corporation owner?

The IRS says an S corporation must pay reasonable compensation to a shareholder-employee for services before making non-wage distributions. It looks at factors such as training, duties, time devoted to the business and what comparable businesses pay. There is no single safe number, and the facts of your business decide it.

### Does a higher salary change my income tax?

In an S corporation, profit generally passes through to the owner whether it is paid as salary or left as a distribution, so the split mainly changes payroll taxes and retirement plan room. Salary can also affect the qualified business income deduction, which your tax professional can model.

### What is the Social Security wage base for 2027?

The SSA set it at $192,300 for 2027, up from $184,500 in 2026. The 6.2 percent Social Security tax applies to wages up to that amount for the employee and the employer each. The 1.45 percent Medicare tax has no cap.

### When will the IRS publish the 2027 401(k) limits?

The IRS usually announces them in late October or November. The 2026 limits came out on November 13, 2025, in Notice 2025-67. Until the 2027 notice is out, the figures in this article for 2027 plan limits are projections.

### Do I have to make catch-up contributions as Roth?

Starting in 2026, an employee whose prior year Social Security wages from the plan sponsor were over $150,000 generally must make catch-up contributions as Roth. Marsh projects that threshold at $155,000 of 2026 wages for 2027.

## Sources

- [Social Security Administration, 2027 Cost-of-Living Adjustment (COLA) Fact Sheet](https://www.ssa.gov/news/en/cola/factsheets/2027.html)
- [Social Security Administration, Social Security announces 3.6 percent benefit increase for 2027 (October 14, 2026)](https://www.ssa.gov/news/en/press/releases/2026-10-14.html)
- [Social Security Administration, Contribution and Benefit Base](https://www.ssa.gov/oact/cola/cbb.html)
- [Marsh People and Investments, Marsh projects 2027 retirement plan limits (updated October 15, 2026)](https://www.mercer.com/en-us/insights/law-and-policy/marsh-projects-2027-retirement-plan-limits/)
- [IRS, S corporation compensation and medical insurance issues](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues)
- [IRS, One-participant 401(k) plans](https://www.irs.gov/retirement-plans/one-participant-401k-plans)
- [IRS, Notice 2025-67, 2026 amounts relating to retirement plans and IRAs](https://www.irs.gov/pub/irs-drop/n-25-67.pdf)
- [IRS, Publication 560, Retirement Plans for Small Business](https://www.irs.gov/publications/p560)

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Author: James Ustby, CFP®, APMA®, Wealth Advisor, LPL Financial, Durham and Chapel Hill, North Carolina. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Examples are hypothetical and for illustration only. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.