How to pay yourself as a business owner comes down to your tax status: sole proprietors and single-member LLCs take an owner’s draw, S corp owners run a reasonable W-2 salary plus distributions, and C corp owners take a salary plus dividends. Whatever the structure, pay yourself a fixed amount on a fixed schedule from real profit, after you set aside taxes and an operating buffer. Then true it up every quarter.

Here’s the scene I’ve watched play out with more founders than I can count. It’s the 28th of the month. The business account says $14,200. They need rent. So they move $6,000 to personal, feel rich for a day, and then a quarterly tax bill and a software renewal land in the same week. Now they’re putting payroll on a credit card and wondering why a “profitable” business feels like a hostage situation.

The problem isn’t the business. It’s that nobody ever told them how to pay themselves like a CEO. That’s what this guide fixes.

This walkthrough from CPA Hector Garcia lays out the draw vs payroll split clearly before we get into the system I’d actually use:

Owner’s Draw vs Salary vs Distributions: What Each One Actually Is

Before you can decide how much, you have to know which door the money walks through. There are only three.

An owner’s draw is a transfer from the business to you. It isn’t a paycheck and it isn’t an expense. It just reduces your owner’s equity. No taxes are withheld, which is exactly why it feels so good and why it hurts so much in April.

A salary is W-2 wages run through payroll. Income tax, Social Security and Medicare get withheld every pay period, and the business files payroll returns. The IRS is clear that corporate officers who perform services are employees, and its Paying yourself page spells out that your wages should line up with your duties.

A distribution is profit paid to you as an owner after salary is covered. In an S corp, distributions aren’t hit with payroll taxes, which is the entire reason people elect S corp status in the first place. In a C corp, the version of this is a dividend, and it gets taxed twice.

The line I want you to remember: a draw is you raiding your company, a salary is your company paying you. Same dollars, completely different discipline.

How You Pay Yourself Depends on How You’re Taxed

Your LLC paperwork doesn’t decide this. Your tax classification does. Here’s the cheat sheet I’d tape to the wall.

That first row catches more people than any other. Taking a smaller draw does not shrink your tax bill as a sole proprietor. You’re taxed on profit, not on what you moved to your personal account. I’ve seen founders leave $40,000 “in the business to be safe” and get a tax bill on every dollar of it anyway.

The S Corp Question: When Salary Plus Distributions Makes Sense

Once profit gets real, the S corp election starts to look attractive because you only pay payroll taxes on the salary portion. I broke down when the math works, and when it doesn’t, in S corp vs LLC, so I won’t repeat the numbers here.

What matters for paying yourself is the order of operations. The IRS says an S corp has to pay reasonable compensation to a shareholder-employee before taking non-wage distributions. Salary first, distributions second. Founders who flip that order, paying themselves $12,000 in salary and $150,000 in distributions, are writing the opening paragraph of their own audit letter.

Two numbers worth knowing for 2026: the Social Security wage base is $184,500, and Medicare has no cap. If your salary is already above that base, more salary only costs you Medicare tax, which changes the conversation entirely.

How Much Should You Pay Yourself? Start With Real Profit, Not the Bank Balance

Your bank balance is the worst number in your business to pay yourself from. It includes money you owe the IRS, money you owe vendors and money a client paid you for work you haven’t done yet.

Here’s the formula I’d use instead:

Owner pay = trailing average monthly profit – tax reserve – buffer top-up

• Trailing average monthly profit: take your last 3 to 6 months of net profit and average it. One great month is a mood, not a salary.
• Tax reserve: park 25% to 30% of profit in a separate tax account. Higher-income founders in high-tax states should lean toward the top of that range or higher.
• Buffer top-up: until you have 2 to 3 months of operating expenses sitting untouched, send a slice of profit there first.

Then pay yourself the number that survives your worst recent month, not your best. A CEO’s salary doesn’t change because one client paid late. Yours shouldn’t either.

How to Pay Yourself as a Business Owner: 6 Steps

1. Confirm your tax classification. Default LLC, partnership, S corp or C corp. This decides draw vs salary, so check your last return or IRS acceptance letter, not your memory.
2. Separate the money into accounts. At minimum: operating, tax reserve and owner pay. When everything sits in one account, every dollar looks spendable.
3. Calculate trailing profit. Run a profit and loss for the last 3 to 6 months. If your books are behind, catching them up is step zero.
4. Set a base pay you can hit every month. Pick a fixed amount and a fixed date, like the 1st and 15th. For an S corp, run it through payroll. For a draw, set an automatic transfer.
5. Pay estimated taxes on schedule. Draw-takers pay through quarterly estimated taxes, generally due April 15, June 15, September 15 and January 15. S corp owners can lean on withholding, but distributions can still create a balance due.
6. True it up every quarter. When the tax account is funded and the buffer is full, take the excess as a bonus draw or distribution. That’s where the upside lives.

This is the system I’d hand any founder who tells me they “pay themselves when there’s money left.” There’s never money left. You have to decide it’s there first.

Pay Yourself Like a CEO, Not a Hostage

I’ve noticed a pattern with founders who never pay themselves. They call it sacrifice. It’s usually fear wearing a hoodie.

When you don’t pay yourself, three things happen. Your personal life quietly borrows from the business in chaotic ways, so the books get messy. You can’t tell whether the business actually works, because its profit is being subsidized by your unpaid labor. And you start resenting the thing you built.

A business that can’t pay its founder a modest, steady salary isn’t profitable yet. It’s a hobby with invoices. That’s not an insult, it’s information, and it’s the most useful number you’ll ever look at.

Even if the base is small, pay it. $2,000 a month on the 1st, every month, changes how you run everything else. You start pricing like someone who has to make payroll, because you do.

Common Mistakes I See When Founders Pay Themselves

• Recording draws as an expense. Draws reduce equity. They don’t reduce taxable profit, and booking them as wages in a sole proprietorship makes your profit look smaller than the IRS will say it is.
• Paying personal bills straight from the business card. It blurs the line between you and the company and turns tax season into forensic accounting.
• The $0 S corp salary. If you work in the business and take profit out, a salary of zero is a red flag, not a strategy.
• Ignoring year-end timing. December is when a bonus, a retirement contribution or an equipment purchase can change your tax bill, which is why I’d run through the year-end tax moves for a one-person business before you take a big fourth-quarter draw.
• Raising your pay after one big month. Raise your base when the trailing average proves it, not when a single invoice clears.

The Bottom Line

Pick the right door for your tax status, pay yourself from profit instead of your bank balance, fund taxes before you fund your lifestyle and put your base pay on a calendar. Then let the quarterly true-up be the reward for running a real company.

The founders I’ve seen build the calmest businesses aren’t the ones making the most money. They’re the ones who decided what they’d pay themselves before the month started.

This article is general education, not tax or legal advice. Rules depend on your entity, state and situation, so confirm your setup with a CPA or tax professional before you change how you pay yourself.

How to Pay Yourself as a Business Owner FAQs

How should a business owner pay themselves?

It depends on how the business is taxed. Sole proprietors and single-member LLCs take owner’s draws, S corp owners take a reasonable W-2 salary plus distributions, and C corp owners take a salary plus dividends, ideally on a fixed schedule.

What is the difference between an owner’s draw and a salary?

An owner’s draw is a transfer from business equity with no taxes withheld. A salary is W-2 wages run through payroll with income tax, Social Security and Medicare withheld. Your tax classification decides which one you’re allowed to use.

Is an owner’s draw taxable?

The draw itself isn’t taxed, but the profit behind it is. Sole proprietors and single-member LLC owners owe income tax and self-employment tax on all net profit, even money left in the business, so set aside taxes before drawing.

How much should I pay myself from my business?

Start with your average monthly profit over the last 3 to 6 months, set aside 25% to 30% for taxes, keep 2 to 3 months of expenses as a buffer, then pay a fixed amount your worst recent month could cover.

Can I pay myself a W-2 salary from a single-member LLC?

Not while it’s taxed by default as a sole proprietorship, because you can’t be a W-2 employee of yourself. If the LLC elects S corp or C corp tax status, you can run yourself through payroll and take a salary.

Solo 401(k) vs SEP IRA comes down to one fact: both accounts cap total 2026 contributions at $72,000, but a Solo 401(k) lets you contribute as both the employee and the employer, so you can put away far more on the same income. For most one-person businesses with no employees, the Solo 401(k) wins. A SEP IRA is the better pick when you need maximum simplicity, you have eligible employees, or you missed the December 31 Solo 401(k) setup window.

Here’s the way I explain it to founders: a SEP IRA rewards you for earning a lot. A Solo 401(k) rewards you for being a business of one. If you’re the only person on payroll, you get access to a retirement account built almost exactly for your situation, and most people never open it because their bank offered them the other one first.

If you’d rather see the math before you read mine, this breakdown from tax attorney Mat Sorensen walks through the same $100,000 income in both accounts and shows why one nearly doubles the other.

Solo 401(k) vs SEP IRA: Side-by-Side Comparison for 2026

Every 2026 number in that table comes straight from the IRS: the $24,500 deferral and $8,000 catch-up, and the $72,000 cap and $360,000 compensation limit that apply to both plans.

Why the Solo 401(k) Lets You Save More on the Same Income

Both accounts share the same ceiling, so a lot of people assume they’re interchangeable. They aren’t. The difference is how fast you can reach that ceiling.

A SEP IRA has one bucket: the employer contribution. You can put in up to 25% of your W-2 pay, or roughly 20% of your net self-employment earnings if you’re a sole proprietor or single-member LLC. That’s it.

A one-participant 401(k) gives you two buckets because you wear two hats. As the employee, you can defer up to $24,500 of your earnings. As the employer, you can add the same 25% (or about 20%) profit-sharing contribution the SEP allows. Stack them together and the gap gets big quickly.

Here’s what that looks like for a sole proprietor in 2026. These are rough figures based on the IRS self-employed contribution method: net profit, minus half of self-employment tax, times about 20%, under age 50.

Look at the first row. A freelancer clearing $40,000 can shelter about four times as much in a Solo 401(k). And the Solo 401(k) hits the $72,000 cap at roughly $252,000 of profit, while the SEP needs about $377,000 to get there. If you’re 50 or older, the Solo 401(k) adds the $8,000 catch-up on top. A SEP gives you nothing extra.

Run your own numbers with the IRS worksheet for calculating your own contribution, or better, with your CPA. Your exact figure depends on your profit, your entity and your other plans.

The S-Corp Salary Trap

If your business is taxed as an S corporation, your retirement contributions are based on your W-2 salary, not your total profit. That changes the math a lot.

Say you pay yourself a $60,000 salary and take the rest as distributions. A SEP lets you put in 25% of that salary, or $15,000. A Solo 401(k) lets you put in $24,500 plus that same $15,000, for $39,500. To max out at $72,000, a SEP needs a $288,000 salary. A Solo 401(k) needs about $190,000.

That’s why low-salary S-corp owners almost always land on the Solo 401(k). It also means your deferrals have to run through real payroll, withheld from your paychecks by year-end and reported on your W-2. If you’re still paying yourself with transfers and calling it a salary, fix that first. I learned that lesson when I paid people out of my personal account and called it being lean. Retirement plans don’t forgive sloppy payroll any more than the IRS does.

One more S-corp wrinkle for 2026: if you’re 50 or older and had more than $150,000 of W-2 wages from your company in 2025, your catch-up contributions now have to go in as Roth. Sole proprietors and partners with only self-employment income aren’t subject to that rule, according to the IRS’s catch-up guidance.

When a SEP IRA Is the Smarter Choice

I’m not anti-SEP. It’s a good account in the right hands. Here’s when I’d pick it:

• You have eligible employees. A Solo 401(k) only works when the only people covered are you and your spouse. Once you hire someone who qualifies, you need a different plan. A SEP can cover employees, but you have to contribute the same percentage of pay for every eligible employee that you contribute for yourself.
• You earn a lot and want almost no admin. If your profit is well above $377,000, both accounts max out at $72,000, and a SEP’s simplicity starts to look better.
• You missed the December 31 window. You can open a SEP and fund it all the way up to your tax filing deadline, including extensions. That makes it the classic “I forgot” account.
• Your income swings a lot. SEP contributions are fully discretionary. You can put in nothing in a bad year and the max in a great one.

One trade-off people miss: a SEP IRA balance counts in the pro-rata calculation if you ever do a backdoor Roth IRA conversion. A Solo 401(k) balance doesn’t. If backdoor Roth contributions are part of your plan, talk to your tax pro before you put a big balance into a SEP.

The December 31 Deadline Most Founders Miss

This is why I’m writing about retirement accounts in November and not in April.

To make 2026 employee deferrals, you should have your Solo 401(k) plan adopted by December 31, 2026, and make your deferral election by then. That’s the rule for anyone paying themselves W-2 wages through an S corp, and it’s the safe deadline for everyone else. Once the plan exists, you generally have until your tax filing deadline to actually deposit the money.

There’s one exception worth knowing. Under SECURE 2.0, a sole proprietor or single-member LLC with no employees can adopt a brand-new Solo 401(k) after year-end and still make employee deferrals for the first year, as long as the deferrals are made by the tax return due date without extensions, which is April 15 for most people. That’s helpful if you’re late, but not every provider supports it. Don’t build your plan on it.

A SEP is more forgiving. According to IRS Publication 560, you can set it up and fund it as late as your business tax return due date, including extensions. With an extension, that can push 2026 SEP contributions to September or October 2027, depending on your entity.

Retirement is one of several things you have to decide before the calendar flips. I covered the rest, from equipment timing to estimated payments, in the year-end tax moves every one-person business should make before December 31.

How to Choose Between a Solo 401(k) and a SEP IRA: 6 Steps

1. Confirm who’s on your team. If anyone other than you and your spouse works enough hours to be eligible, a Solo 401(k) is off the table. Look at a SEP, SIMPLE IRA or standard 401(k).
2. Find the right income number. Sole proprietors use net profit minus half of self-employment tax. S-corp owners use W-2 salary only.
3. Run both contributions. SEP: about 20% of net self-employment earnings (or 25% of W-2 pay). Solo 401(k): that same amount plus up to $24,500, plus catch-up if you’re 50 or older.
4. Decide on Roth vs pre-tax. If you want Roth dollars or 401(k) loan access, the Solo 401(k) is the practical choice.
5. Check the calendar. Before December 31: open the Solo 401(k) if it wins. After December 31: a SEP may be your only option for 2026, unless you qualify for the first-year sole-proprietor exception.
6. Bring it to a pro, then open the account. Choose a provider, sign the plan document, set up deferrals through payroll if you’re an S corp, and set a reminder for Form 5500-EZ once assets reach $250,000.

Common Mistakes I See With Solo 401(k)s and SEPs

• Opening a SEP by default. The bank offered it, so you took it. You may be leaving $24,500 a year of contribution room on the table.
• Using profit instead of W-2 pay as an S-corp owner. Your contribution is based on your salary. Distributions don’t count.
• Doubling up on the deferral. The $24,500 employee limit is per person across all 401(k)s. If you also have a day job with a 401(k), your Solo deferrals share that limit.
• Hiring without checking the plan. A first employee can end your Solo 401(k) eligibility. Talk to your provider before the offer letter goes out.
• Forgetting the 5500-EZ. Once a Solo 401(k) reaches $250,000, an annual filing is required. Missing it can bring steep penalties.

The Bottom Line

If you’re a business of one, a Solo 401(k) is usually the strongest retirement account available to you. You can save more on less income, you get catch-up room and a real Roth option, and you can borrow from it in an emergency. A SEP IRA earns its place when you have employees, when your profit is high enough that both accounts max out, or when the calendar has already made the decision for you.

Your business already pays you. Make sure it pays your future self too, and pick the account before December 31 picks it for you.

This article is educational and isn’t personal tax, legal or financial advice. Contribution limits, entity type and your own situation all matter. Talk to a CPA, enrolled agent or fiduciary financial adviser before you open or fund a retirement plan.

Solo 401(k) vs SEP IRA FAQs

Which is better for a one-person business, a Solo 401(k) or a SEP IRA?

For most owners with no employees, a Solo 401(k). It allows a $24,500 employee deferral on top of the same employer contribution a SEP allows, plus catch-up contributions, Roth deferrals and loans. A SEP is simpler and fits businesses with employees.

What are the 2026 contribution limits for a Solo 401(k) and SEP IRA?

Both cap total contributions at $72,000 for 2026. A Solo 401(k) adds an $8,000 catch-up at age 50 or older, or $11,250 at ages 60 to 63. A SEP has no catch-up contribution.

When is the deadline to open a Solo 401(k) for 2026?

Generally December 31, 2026, to make 2026 employee deferrals. Sole proprietors with no employees opening their first plan may adopt it by their tax filing deadline without extensions. A SEP can be opened until the return due date, including extensions.

Can I have both a Solo 401(k) and a SEP IRA?

Sometimes, but contributions from the same business share one $72,000 limit, and you can’t use the IRS model SEP form if you also maintain another retirement plan. Most solo founders pick one account. Check with your provider and tax pro first.

Does a SEP IRA allow Roth contributions?

SECURE 2.0 allows Roth SEP contributions, but many custodians still don’t offer them. SEPs also don’t allow employee deferrals. If Roth savings matter to you, a Solo 401(k) with a Roth option is usually the practical choice.

S corp vs LLC isn’t really an either-or choice: an LLC is a legal entity you form with your state, and an S corporation is a tax election you make with the IRS, often for that same LLC. The S-corp election pays when your business profit is well above a reasonable salary for the work you do, because you only pay the 15.3% payroll tax on the salary, not on every dollar of profit. Below roughly $80,000 of steady profit, payroll, an extra tax return and state fees usually swallow most of the savings.

Here’s how I put it to founders who ask me whether they should “become an S corp”: the S-corp election is a tax tool, not a promotion. When the numbers support it, it can keep thousands of dollars a year in your business. When they don’t, it’s a $3,000-a-year ego move: you pay for payroll software, a corporate return and a tax pro so you can say “my S corp” at dinner, and you end up roughly where you started.

If you’d like a CPA to walk through the numbers before you read mine, this 2026 breakdown from Sherman at My CPA Coach is one of the clearest out there. He also covers the retirement-contribution catch most people miss.

Is an LLC a Tax Status? No. Here’s the Difference

This is where most of the confusion starts. An LLC is a legal structure. You file articles of organization with your state, and you get a company that’s separate from you on paper. It doesn’t tell the IRS how to tax you.

By default, the IRS treats a single-member LLC as a disregarded entity, which means it’s taxed like a sole proprietorship. A multi-member LLC is taxed like a partnership. In both cases the profit flows to your personal return, and if you work in the business, every dollar of that profit is subject to self-employment tax.

An S corporation is a tax classification. You don’t “form” an S corp the way you form an LLC. You form an LLC (or a corporation), then you file Form 2553 and ask the IRS to tax it as an S corporation. The legal entity stays the same. Your liability protection stays the same. What changes is how the money gets taxed and how much paperwork you sign up for.

So the real question isn’t “LLC or S corp?” It’s “Should my LLC stay on default tax treatment, or elect S-corp status?” If you haven’t formed the entity yet, do that first. I wrote about why I formed the company before I felt ready, and it’s still the step I’d tell anyone to take before thinking about tax elections.

S Corp vs LLC: Side-by-Side Comparison

The 2026 Math: When the S-Corp Election Actually Pays

Here’s the core mechanic. As a default LLC owner, you pay self-employment tax of 15.3% (12.4% Social Security plus 2.9% Medicare) on 92.35% of your net profit. The Social Security piece stops at the 2026 wage base of $184,500, but Medicare never stops.

With an S-corp election, you pay yourself a reasonable salary through payroll. That salary carries the same 15.3% (half paid by the company, half withheld from you). The rest of the profit comes out as distributions, which don’t carry payroll tax. That gap is the whole game.

What most “S corps save you $10k!” posts leave out is the other side of the ledger. Two things shrink the savings:

• The QBI deduction gets smaller. The qualified business income deduction lets eligible owners deduct up to 20% of business income, and the 2025 tax law made it permanent. In an S corp, your salary isn’t QBI, so a smaller slice of your income qualifies. You also lose the deduction for half of your self-employment tax.
• Compliance isn’t free. A payroll service, a Form 1120-S return and a more involved personal return typically run $2,000 to $3,000 a year. Some states add their own tax on S corps.

So I ran the numbers the honest way. These are rough federal-only estimates for a single filer with no other income, taking the 2026 standard deduction and 2026 brackets, and including the QBI effect:

Look at that first row. A founder clearing $50,000 who elects S-corp status to “save on taxes” usually pays more once the bills land. That’s the ego move in black and white. The middle rows are the gray zone where state taxes, health insurance and retirement plans decide it. The bottom row is where the election starts doing real work.

Your numbers will differ, and that’s the point. If your salary has to be higher because of the work you do, the savings shrink. If you live in a state with an S-corp tax or a city that doesn’t recognize the election, they shrink again. Run your own figures with a CPA before you file anything.

What “Reasonable Salary” Really Means

This is the part people try to game, and it’s the part the IRS watches. The rule is simple: if you’re a shareholder who works in the business, the S corp must pay you reasonable compensation before taking distributions.

There’s no official percentage. The “60/40 rule” you’ll see online isn’t an IRS rule. The IRS looks at factors like your training and experience, your duties, the time you put in, and what comparable businesses pay for similar services. The test I use is blunt: what would you have to pay someone else to do your job? If you’re a consultant billing $180,000 a year and you pay yourself $20,000, you aren’t being clever. You’re creating an audit story.

Reasonable salary also means real payroll. Not Venmo. Not a monthly transfer you call “my paycheck.” I know this one personally, because I paid people out of my personal account and called it being lean. An S corp forces the grown-up version: withholding, quarterly filings, W-2s at year-end.

When an S Corp Is a $3,000-a-Year Ego Move

I’ve watched founders elect S-corp status because a podcast host said “every serious business owner has one.” Here’s when I’d hold off:

• Your profit is under about $60,000 to $80,000, or it’s unpredictable. One great year doesn’t justify a permanent payroll obligation.
• You plan to raise venture capital. Most institutional investors want a Delaware C corporation. An S corp can’t have entity investors or multiple stock classes, so you’ll likely convert anyway.
• You have a co-founder or investor who isn’t a U.S. citizen or resident. Nonresident aliens can’t be S-corp shareholders. One ineligible owner can terminate the election.
• You want flexible profit splits. Multi-member LLCs can allocate profits by agreement. S corps must distribute strictly by ownership percentage.
• You want to max out retirement savings on a low salary. In an S corp, your Solo 401(k) employer contribution is based on your W-2 wages, not total profit. A low salary can cap how much you put away.
• Your state takes a big bite. California, for example, charges S corps a 1.5% franchise tax on net income with an $800 minimum, and New York City doesn’t recognize the federal S election for its own corporate tax.

None of those are reasons to never elect. They’re reasons to run the numbers first and stop treating “S corp” like a status symbol.

How to Decide on the S-Corp Election: 6 Steps

1. Get your real profit number. Use last year’s return and this year’s books, not your best month. You want steady net profit after expenses.
2. Price your own job. Research what it would cost to hire someone to do what you do. That’s your starting point for a reasonable salary.
3. Run the gap. Profit minus salary is the amount that escapes payroll tax. Multiply by roughly 15.3% for a first-pass savings estimate, then subtract the QBI and deduction effect.
4. Subtract the costs. Payroll service, Form 1120-S prep, state S-corp taxes and any registered-agent or annual fees. If what’s left is under a couple of thousand dollars, wait a year.
5. Check the side effects. Retirement contribution limits, health insurance treatment (premiums for owners with more than 2% get added to your W-2), owner eligibility and your fundraising plans.
6. Bring it to a CPA, then file on time. If it pencils out, file Form 2553 and set up payroll before your first salary payment.

The Form 2553 Deadline: March 15 for Most Founders

Timing is why I’m writing this in November and not in April. For an existing calendar-year business, Form 2553 must be filed no more than two months and 15 days after the start of the tax year it should apply to. For a 2027 election, that’s March 15, 2027. You can also file anytime during 2026 to make the election effective January 1, 2027.

A brand-new company has two months and 15 days from the date its first tax year begins. Every shareholder has to sign the form, and an LLC filing Form 2553 doesn’t need a separate Form 8832 first. If you miss the deadline, the IRS offers late-election relief in many cases when you have reasonable cause, but you don’t want to build your tax plan on a relief procedure.

My advice: use November through January to run the numbers with your tax pro, so you’re making a decision instead of a panicked filing in the second week of March. While you’re in planning mode, it’s also the right window for year-end moves like retirement contributions and equipment purchases.

Common S-Corp Mistakes I See

• Electing too early. Electing in year one on projected profit that never shows up.
• Paying yourself zero salary. Distributions with no salary is the classic red flag.
• Forgetting payroll exists. Missing quarterly payroll filings can generate penalties that wipe out a year of savings.
• Ignoring state rules. The federal win can turn into a state loss.
• Mixing money. Distributions should come from a business account and be recorded properly, not pulled ad hoc for groceries.
• Never revisiting it. If profit drops, the election can become a cost. Review it every year.

The Bottom Line

An LLC protects you. An S-corp election, used at the right profit level, makes that protection cheaper to run. Used too early, it’s an expensive costume. Build the business first, get the profit steady, price your own job honestly, and let the math decide.

Elect S-corp status when the numbers earn it, not when your ego wants the title.

This article is educational and isn’t personal tax, legal or financial advice. Tax rules, state taxes and your own situation matter a lot here. Talk to a CPA or enrolled agent before filing Form 2553 or changing how you pay yourself.

S Corp vs LLC FAQs

Is an LLC the same as an S corp?

No. An LLC is a legal entity formed under state law. An S corporation is a federal tax election. An LLC can elect to be taxed as an S corp by filing Form 2553, and it stays an LLC legally.

At what income does an S corp make sense?

Usually when steady net profit is well above a reasonable salary for your role. For many owner-operators, savings become meaningful above roughly $80,000 to $100,000 of profit after payroll, tax prep and state costs.

What is the Form 2553 deadline?

For a calendar-year business, Form 2553 is due by March 15 for the election to apply to that tax year. New businesses have two months and 15 days from the start of their first tax year.

How much salary do I have to pay myself in an S corp?

A reasonable salary based on your duties, experience, time and what comparable businesses pay for similar work. The IRS sets no fixed percentage, and paying yourself little or nothing is a common audit trigger.

Does an S corp election change my LLC’s liability protection?

No. Liability protection comes from the legal entity, not the tax election. Electing S-corp status changes how profits are taxed and adds payroll and filing requirements, but your LLC’s legal protection stays the same.

There are roughly two months left in the 2026 tax year, and for a one-person business that window is worth more than most founders realize. Once December 31 passes, many of the decisions that shape your tax bill are locked in. Before it passes, you still have room to time purchases, fund retirement accounts, tidy up contractor paperwork, and make sure you aren’t heading into a penalty for underpaying through the year.

This year also carries more change than usual. The tax law signed on July 4, 2025, which the IRS now refers to as the Working Families Tax Cuts and which many people still call the One Big Beautiful Bill, rewrote several rules that matter to solo founders, freelancers and small online businesses. Some of those changes apply for the first time to payments you make in 2026. The year-end tax moves below are written for US-based solo operators. They’re a framework for a better conversation with your accountant, not a substitute for one, because the right move always depends on your entity type, your income, and your state.

Close Your Books Before You Make Any Decisions

Every good year-end decision starts with knowing where you actually stand. Before you buy equipment or move money into a retirement account, get your books current through October. Reconcile every business bank and card account, categorize the transactions that have been sitting in a suspense folder, and chase down receipts for anything significant. Then build a simple projection for November and December based on contracts you’ve signed, invoices you expect to collect, and costs you know are coming.

That projection gives you an estimated profit for the year, and almost everything else in this article depends on that number. A founder heading for a strong year has very different options from one who had a slow first half. Guessing at this figure is how people end up buying a laptop they didn’t need to save tax they didn’t owe, or skipping a contribution they could easily have made.

If you want to understand the business provisions of the new law in more depth, the IRS published a recorded webinar on its official YouTube channel walking through the business tax provisions.

Check Your Estimated Tax Position Now, Not in April

Most solo founders don’t have an employer withholding tax from their pay, which means the responsibility for paying through the year sits with them. The IRS explains on its estimated taxes page that most taxpayers avoid the underpayment penalty if they owe less than $1,000 after withholding and credits, or if they paid at least 90% of the current year’s tax or 100% of the prior year’s tax, whichever is smaller. The IRS also notes special rules for certain higher-income taxpayers, so check which threshold applies to you.

Run the numbers against your projection now. If revenue jumped this year, your earlier quarterly payments may have been based on a much smaller tax bill, and the final payment of the year is your chance to close the gap. If you’re short, you’ll know while there’s still time to set the cash aside. If you’re ahead, you can stop worrying and keep that money working in the business. Either way, finding out in late October is far better than finding out when you file.

Time Equipment Purchases Around When They Go Into Service

One of the most significant changes in the new law is the return of full expensing for many business assets. The IRS states that the law provides a permanent 100% additional first-year depreciation deduction, often called bonus depreciation, for qualified property acquired after January 19, 2025. It also raised the Section 179 expensing limit to $2,500,000 for property placed in service in tax years beginning after December 31, 2024, with that amount indexed for inflation in later years.

For a solo business, the practical point is simpler than the code sections suggest. If you were already planning to buy a computer, camera gear, studio equipment or other qualifying property in the next few months, buying it and putting it into use before December 31 can bring the deduction into 2026 instead of spreading it over several years. The IRS’s guidance for gig economy workers notes that for property such as vehicles or certain computers, business use must be more than 50% of total use to deduct up to the full cost of the business-use percentage in the first year.

The key words are “already planning.” Spending a dollar to save a fraction of that dollar in tax is still spending money. Buy what the business genuinely needs, keep the receipts and the date it was first put into service, and let your accountant decide whether expensing it all now or depreciating it over time makes more sense for your situation.

Use the Retirement Plan Window While It’s Open

For many profitable solo founders, a retirement plan is the single biggest lever available, and it also happens to build long-term wealth instead of just reducing a bill. The IRS announced that for 2026 the 401(k) elective deferral limit rises to $24,500, the catch-up contribution for people 50 and over rises to $8,000, and a higher catch-up of $11,250 applies to those aged 60 to 63. The IRA limit rises to $7,500, and the overall limit for defined contribution plans is $72,000.

Those numbers matter because a one-person business can often contribute in two capacities. The IRS explains that in a one-participant 401(k), the owner can make elective deferrals as the employee and also make employer nonelective contributions, subject to the overall limit, with special calculation rules for self-employed people. A SEP is the simpler alternative. According to the IRS, a business of any size, including a self-employed person, can establish a SEP plan as late as the due date, including extensions, of the business tax return for the year, with contributions of up to 25% of each employee’s pay.

Because the deadlines and paperwork differ between plan types, don’t leave this until the last week of December. Talk to your plan provider or accountant in November about which plan fits, what has to be in place by year-end, and what can wait until you file. If you’ve been treating retirement savings as something you’ll get to once the business is bigger, this is the year to reconsider. The habits you build around money now have a lot to do with how your business turns out, and how you approach personal finances can influence your entrepreneurial journey far more than most founders expect.

Get Ahead of Contractor Paperwork

If you pay freelancers, designers, editors or developers, the new law changes your January workload. The IRS confirms that the Form 1099-NEC threshold has increased to $2,000 for payments made in 2026, up from the $600 threshold that applied for decades. Starting in 2027, that amount can be adjusted for inflation. That means some smaller contractor relationships that used to require a form no longer will.

Don’t let the higher threshold make you sloppy, though. You still need to know exactly how much you paid each contractor during the year to decide who crosses the line, and the IRS notes that a 1099-NEC is still required for anyone from whom you withheld federal income tax under backup withholding rules, regardless of the amount. The smart year-end move is to pull a payee report now, collect any missing W-9 forms while people are still responsive, and fix incomplete names or tax ID numbers before the January filing rush. If you’ve already built a system for how you handle contracts and payments without a team, make W-9 collection part of contractor onboarding so this becomes a non-event next year.

Know What Payment Platforms Will Report About You

Many online businesses get paid through payment apps and marketplaces, and the rules for what those platforms report have also changed. The IRS explains that the law retroactively reverted the Form 1099-K reporting threshold for third-party settlement organizations to its earlier level, so these platforms are required to issue a 1099-K when payments in the calendar year exceed $20,000 and the number of transactions exceeds 200.

The important part is what the IRS says next. You must report all of your income when you file, whether or not you receive a 1099-K or any other information return. A higher reporting threshold changes the paperwork you receive, not what you owe. Make sure your own records capture every stream of revenue, including smaller platforms that may never send you a form, so your return reflects the business as it really is.

Don’t Leave the Qualified Business Income Deduction to Chance

Many owners of sole proprietorships, partnerships and S corporations have been able to use the qualified business income deduction for tax years beginning after 2017, and the new law made it permanent. The IRS describes it as allowing eligible taxpayers to deduct up to 20% of their qualified business income, subject to limitations, and notes that it’s available whether you itemize or take the standard deduction. For tax years beginning after 2025, the IRS also lists a new minimum deduction for active qualified business income. Income earned through a C corporation, or as an employee, isn’t eligible.

The deduction interacts with your taxable income, your type of business, and for higher earners, factors like wages paid and property held. That’s exactly why it belongs in your year-end conversation rather than as a surprise at filing time. Your projection, your retirement contributions and your equipment purchases all change your taxable income, and that in turn can change how much of this deduction you keep.

Set Up 2027 Before the Year Even Starts

The best year-end tax move is making next year’s year-end boring. Open a separate account for tax money if you don’t have one, and move a fixed percentage of every payment you receive into it. Put the quarterly estimated payment dates in your calendar now. Decide which bookkeeping tool you’ll use and commit to reconciling monthly rather than in a panic every December. Book a planning session with your accountant for mid-2027, when there’s still time to act on what you learn.

None of this is glamorous, but it’s the kind of discipline that separates a business that grows on purpose from one that keeps being surprised by its own numbers. Spend a few focused hours on these year-end tax moves over the next few weeks, bring your projection and your questions to a qualified professional, and you’ll go into 2027 with more cash, fewer surprises, and a much clearer picture of what your business really earns.