Small business owners face a higher tax burden than employees — but they also have far more tools to reduce it. The right combination of entity structure, retirement contributions, and deductions can cut an effective tax rate from 35% to under 20% on the same income.
How Small Business Income Is Taxed
Tax Rates by Entity Type
| Structure | Taxes Paid | Key Filing Forms |
|---|---|---|
| Sole Proprietor | Income tax + 15.3% SE tax | Schedule C + Form 1040 |
| Single-Member LLC | Same as sole proprietor (default) | Schedule C + Form 1040 |
| Multi-Member LLC | Partners pay income tax + SE tax on share | Form 1065 + Schedule K-1 |
| S-Corporation | Income tax on all income; SE tax only on salary | Form 1120-S + Schedule K-1 |
| C-Corporation | 21% corporate tax; dividend tax on distributions | Form 1120 |
Total Tax on $100,000 Net Profit (Before Deductions)
| Structure | SE/Payroll Tax | Income Tax (22% bracket) | Estimated Total |
|---|---|---|---|
| Sole proprietor / LLC | $14,130 | $13,200 | $27,330 |
| S-Corp ($60K salary, $40K distribution) | $9,180 | $13,200 | $22,380 |
| C-Corp | $21,000 (corporate) | Tax on any distributions | $21,000+ |
Before deductions. S-Corp saves ~$4,950 in SE/payroll tax in this example.
The S-Corporation Savings Strategy
Converting a sole proprietorship or LLC to S-corp status is one of the highest-ROI tax moves for profitable small businesses.
How it works: An S-corp must pay you a “reasonable salary” — which is subject to payroll taxes (FICA: 15.3%). Profit above your salary comes out as a distribution — not subject to self-employment or payroll tax.
S-Corp Savings at Different Profit Levels
| Annual Profit | Reasonable Salary | Distribution | SE Tax Saved | Annual S-Corp Cost | Net Saving |
|---|---|---|---|---|---|
| $80,000 | $55,000 | $25,000 | $3,825 | $2,000 | $1,825 |
| $120,000 | $65,000 | $55,000 | $8,415 | $2,500 | $5,915 |
| $150,000 | $70,000 | $80,000 | $12,240 | $3,000 | $9,240 |
| $200,000 | $85,000 | $115,000 | $17,595 | $3,500 | $14,095 |
| $300,000 | $100,000 | $200,000 | $30,600 | $4,000 | $26,600 |
SE tax saved = 15.3% × distribution amount. S-corp costs include payroll service + additional accounting.
When to make the switch: Generally worth it above $60,000–$80,000 in annual profit. Below that, the additional accounting costs (payroll service, separate corporate tax return) exceed the savings.
Top Tax Deductions for Small Businesses
The QBI Deduction: 20% Off the Top
The Qualified Business Income deduction (Section 199A) lets eligible sole proprietors, LLC owners, S-corp and partnership shareholders deduct 20% of qualified business income from taxable income — before calculating income tax.
| Net Business Profit | QBI Deduction (20%) | Tax Savings (22% bracket) | Tax Savings (24% bracket) |
|---|---|---|---|
| $60,000 | $12,000 | $2,640 | $2,880 |
| $100,000 | $20,000 | $4,400 | $4,800 |
| $150,000 | $30,000 | $6,600 | $7,200 |
| $200,000 | $40,000 | $8,800 | $9,600 |
Income phase-out (2026): Above $197,300 single / $394,600 married, the deduction phases out for “specified service trade or business” (SSTB) owners — doctors, lawyers, consultants, accountants, financial advisors. For non-SSTB businesses, W-2 wage and property limits apply above these thresholds.
Retirement Plan Contributions
| Plan | 2026 Employee Limit | Total Limit (Employee + Employer) | Best For |
|---|---|---|---|
| Solo 401(k) | $23,500 | $70,000 ($77,500 age 50+) | Self-employed with no employees |
| SEP IRA | — | 25% of net SE income (max $70,000) | Simple to set up; high limits |
| SIMPLE IRA | $16,500 | Varies | Businesses with a few employees |
Solo 401(k) worked example at $150,000 net profit:
- Employee elective deferral: $23,500
- Employer profit-sharing (25% of net SE income ~$136,500): $34,125
- Total deductible contribution: $57,625
- Tax savings (24% bracket + 15.3% SE tax on the SE tax deduction): ~$16,000
Health Insurance Premiums
Self-employed owners can deduct 100% of health, dental, and vision insurance premiums — for themselves, their spouse, and dependents — directly from gross income (not subject to the 7.5% AGI floor that applies to itemized medical deductions). This deduction reduces both income tax and, indirectly, self-employment tax.
Section 179 and Bonus Depreciation (2026)
| Provision | 2026 Details |
|---|---|
| Section 179 limit | $1,250,000 (phases out above $3,130,000 in total purchases) |
| Bonus depreciation | 40% immediate expensing (phasing down from 100% in 2022) |
| Qualifying property | Machinery, equipment, computers, software, some vehicles, qualified improvement property |
| Section 179 income limit | Cannot create a business loss (unused amount carries forward) |
| Bonus depreciation | Can create or increase a net operating loss |
Example: Buy $80,000 in new equipment. Section 179: deduct $80,000 immediately. Or bonus depreciation: deduct $32,000 (40%) in year 1, depreciate remainder. Section 179 is usually better unless you expect higher income in future years.
Vehicle Expenses
| Method | How It Works | Best For |
|---|---|---|
| Standard mileage | $0.70/mile for business miles (2026) | Low-cost vehicles, simpler |
| Actual expense | Prorate all vehicle costs by business % | High-cost or heavy vehicles |
| Section 179 on vehicle | Deduct purchase price (limits apply for passenger vehicles) | Heavy SUVs, trucks (>6,000 lb GVWR) |
Heavy vehicle advantage: Vehicles with GVWR over 6,000 lbs (many SUVs, pickups, vans) qualify for $30,500 in Section 179 deduction in 2026 for the passenger vehicle sub-limit — effectively deducting a large portion of the purchase price in year one.
Other Common Business Deductions
| Deduction | Details |
|---|---|
| Employee wages and salaries | Fully deductible; include payroll tax employer portion |
| Independent contractor payments | Fully deductible; issue 1099-NEC for payments ≥ $600 |
| Business rent | Office, retail, warehouse space |
| Business insurance | Liability, E&O, property, workers’ comp, key-man life |
| Professional services | Accounting, legal, consulting fees |
| Marketing and advertising | Website, ads, social media management, trade shows |
| Software and subscriptions | Business software, CRM, cloud services |
| Business meals | 50% deductible; must have business purpose, document it |
| Home office | $5/sq ft simplified or actual expenses (exclusive use required) |
| Bank fees and merchant processing | Credit card processing fees, business account fees |
Tax Filing Calendar for Small Businesses
| Obligation | Due Date | Notes |
|---|---|---|
| Q1 estimated tax | April 15, 2026 | Jan–Mar income |
| Q2 estimated tax | June 16, 2026 | Apr–May income |
| Q3 estimated tax | September 15, 2026 | Jun–Aug income |
| Partnership / S-corp return | March 17, 2026 | Form 1065 / 1120-S |
| Sole proprietor / LLC return | April 15, 2026 | With Form 1040 |
| Q4 estimated tax | January 15, 2027 | Sep–Dec income |
| W-2s to employees | January 31 | No extension |
| 1099-NEC to contractors | January 31 | For payments ≥ $600 |
Payroll Tax Obligations (If You Have Employees)
When you hire W-2 employees, you take on payroll tax responsibilities:
| Tax | Employer’s Share | Employee’s Share | Deposit Frequency |
|---|---|---|---|
| Social Security | 6.2% | 6.2% | Monthly or semi-weekly |
| Medicare | 1.45% | 1.45% | Monthly or semi-weekly |
| Federal Unemployment (FUTA) | 6% on first $7,000 | — | Quarterly if > $500 |
| State Unemployment (SUTA) | Varies by state | — | Varies |
Payroll is typically handled via a payroll service (Gusto, QuickBooks Payroll, ADP) — the cost ($50–$150/month for a small team) is a business deduction and far less expensive than payroll tax penalties for errors.
Accountable Plans for S-Corp Owners
If you operate as an S-corp, you cannot deduct business expenses directly on your personal return. Instead, your S-corp needs an accountable plan — a reimbursement policy where the corporation reimburses you for documented business expenses, then deducts those reimbursements on the corporate return.
Common expenses covered by accountable plans:
- Home office (based on a square footage calculation)
- Cell phone (business percentage)
- Vehicle mileage
- Business supplies and equipment purchased personally
Without an accountable plan, these expenses may be lost deductions for S-corp owners.
The content on Wealthvieu is for informational purposes only and should not be considered financial, tax, or investment advice. Consult a qualified professional before making financial decisions. Full disclaimer · Editorial policy