Compensation used in a 401k plan

We have a pretty straightforward small 401k plan (about 6 participants) that uses W-2 wages for plan compensation.  The owner wants to transition from W-2 wages to providing "guaranteed payments" to all employees.  I am not certain I completely understand what this involves but he says they can withhold 401k contributions before making the guaranteed payments.  But do guaranteed payments also have federal/state/local taxes withheld before being paid? If not, can these wages still be used for 401k plan purposes?

Any advice on what questions we should be asking would be greatly appreciated.

Thank you

Is the company a partnership? And are they talking about making the employees partners? Guaranteed payments are payments from the partnership to a partner. If the employees become partners, then their compensation for plan purposes will be net earned income, the same as any other self-employed individual. If the guaranteed payments are being paid out during the year as partnership draws, then they can be deferred from, but there is a risk that the net earned income at the end of the year may not support the amount deferred, e.g. if the partnership had a net loss.