Planning topic · Business owners
The same profit can be taxed very differently depending on the structure, the salary you pay yourself and what goes into a retirement plan. Most of these choices must be made before year-end. We compute the tax under each option, then you decide.
Why plan
Many structures were chosen on day one and never revisited, though profit has multiplied since.
These choices are linked: a lower salary cuts payroll tax but can also shrink the QBI limit and the amount a retirement plan can take. They have to be computed together, not one at a time.
When
Most arrangements must be in place by December 31.
One by one
Not all of them suit you. Step one is deciding which are worth doing.
Net profit of a sole proprietor or single-member LLC bears 15.3% self-employment tax (the Social Security part stops at $184,500 for 2026). An LLC can elect S-corp taxation without changing its state-law form.
Profit level, employees, plans to raise money or sell, and what your state charges each kind of entity.
An owner-employee must be paid reasonable wages, with payroll tax, before distributions — which then carry no payroll tax. If wages are too low the IRS can reclassify distributions as wages.
Your duties, pay in your industry, the company’s profit, and what salary does to other deductions.
Up to 20% of qualified business income is deductible, now permanently. For 2026, above $201,750 of taxable income ($403,500 joint) wage and property limits phase in and specified service trades phase out. Wages paid to the owner are not QBI.
Where your taxable income falls, whether your trade is a specified service, and the ratio of wages to profit.
For 2026 a solo 401(k) takes up to $24,500 as employee (more from age 50) and up to $72,000 in total with the employer part. A cash balance or other defined benefit plan allows larger, actuarially determined deductions.
Your age, how steady profit is, whether you have employees, and how much you want to put away.
Under a proper reimbursement plan, substantiated business expenses repaid to an employee — the owner included — are not wages. Renting your home to the business for meetings on no more than 14 days a year keeps the rent out of your income, but only at a documented market rate for real business use.
How home office, vehicle and travel costs are handled now, and the policy and records still needed.
Children who really work for reasonable pay can be on payroll. A child under 18 employed by a parent’s sole proprietorship (or the parents’ partnership) is exempt from Social Security and Medicare tax; a corporation, S-corps included, is not.
The work actually done, the pay and records, and your entity type.
Many states let partnerships and S-corps elect to pay state income tax at the entity level; that tax is deducted federally by the entity, outside the individual cap on state tax deductions.
Whether your state offers the election, its deadlines and payment dates, and your own state tax deduction.
For 2026 up to $2,560,000 of equipment can be expensed under section 179, and qualifying property acquired after January 19, 2025 can be depreciated 100% in the first year. Health premiums of a more-than-2% S-corp shareholder must run through W-2 wages to be deductible.
Planned purchases, acquisition and in-service dates, and how health insurance is handled now.
Common mistakes
Usually because the pieces were never computed together.
How we work
The same levels as our tax planning service, built around your business.
Go through the business and the questions on your mind. The CPA explains the rules and options; you receive a written recap.
Structure, salary, QBI, retirement plans and more computed one by one, full-year tax compared across options, written up and explained.
Quarterly reviews of profit and estimates, and a year-end pass over the year’s arrangements; payroll, books and returns can come to us too.
Typical situations
Hypothetical situations that show how planning works — not client results. Conclusions differ for everyone.
A self-employed consultant whose net profit has grown three years running, still filing as a sole proprietor.
Husband and wife run a restaurant with a dozen employees; two teenagers help on weekends.
A physician in solo practice with high, steady income who wants to save more for retirement.
There is no fixed number. It is the self-employment tax saved against payroll, a corporate return and state charges — and it depends on the salary. We compute it with your figures.
By what you do, the time you spend and what the role pays in your industry. There is no official formula, but it needs support and a record.
The election is generally due within two and a half months of the start of the tax year. Late-election relief exists but has conditions.
Yes, if they really work, the pay matches the work and records are kept. Whether payroll tax is waived depends on your entity type.
The rule allows it, but the rent must be a supported market rate for meetings with a real, recorded business purpose. The Tax Court has allowed far less than a taxpayer claimed, so care is needed.
Deadlines differ by plan, and some fall before year-end. Start looking in the third quarter.
Yes. Payroll, books and business and personal returns can all come to us, or planning alone.
Fixed fees, quoted before work starts. They follow the scope and complexity of the work, never the amount of tax saved.
Request
About 3 minutes. Sending a request costs nothing and is not an engagement.
Book a one-on-one paid consultation with a CPA. The fee is credited if you move on to planning.
This page is general information, not tax advice for your situation. Conclusions depend on the facts you provide and the law in force; the dollar amounts are 2026 figures, adjusted each year, and state rules differ.
