The 2026 tax year marks a turning point for S-Corporation owners. With the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025, several temporary provisions are now permanent. That means S-Corp tax planning strategies you’ve used before aren’t going anywhere. But it also means the rules have changed in subtle ways worth understanding.
This guide breaks down the most effective S-Corp tax planning strategies for 2026, from salary optimization to retirement contributions to the newly permanent QBI deduction.
Key Takeaways
- Salary vs. distribution optimization is the foundational S-Corp tax strategy—get it right and save thousands in FICA taxes
- The QBI deduction is now permanent under the OBBBA, eliminating the 2025 expiration uncertainty
- Retirement contributions of up to $72,000 combined (2026) shelter income while building wealth
- Section 179 allows immediate deduction of equipment purchases up to $1,320,000
- Year-round planning beats December scrambles—many strategies require advance setup
Table of Contents
What Changed for S-Corps in 2026
The OBBBA brought stability to S-Corp tax planning. Here’s what’s different:
The QBI Deduction Is Now Permanent
The 20% Qualified Business Income deduction under Section 199A was set to expire after 2025. It’s now permanent. S-Corp owners can continue deducting up to 20% of their qualified business income indefinitely.
Starting in 2026, there’s also a new $400 minimum QBI deduction for qualifying businesses with at least $1,000 of active income. Even if your deduction would otherwise phase out, you’ll get at least $400.
Updated Thresholds and Limits
Several key numbers changed for 2026:
- QBI income thresholds: $203,000 (single) / $406,000 (married filing jointly)
- Section 179 limit: Approximately $1,320,000
- SALT cap: Approximately $40,400 (indexed through 2029)
- Bonus depreciation: 60% (continues scheduled phase-down)
Why This Matters
Permanent rules mean you can plan with confidence. You’re not racing against an expiration date. That makes multi-year tax planning more reliable than it’s been in years.
For a comprehensive overview of S-Corporation taxation, see our S-Corporation Tax Guide.
Salary vs. Distribution Optimization
This is the foundational S-Corp tax strategy. Get it right, and you’ll save thousands. Get it wrong, and you’ll face IRS scrutiny.
How It Works
S-Corp owners who work in the business must pay themselves a “reasonable” W-2 salary. That salary is subject to FICA taxes: 6.2% Social Security (up to the wage base) plus 1.45% Medicare from both the employee and employer side. That’s 15.3% total.
Any remaining profit you take as distributions isn’t subject to employment taxes.
The Math
Say your S-Corp generates $200,000 in net income. You set a reasonable salary at $80,000 and take the remaining $120,000 as distributions.
- FICA on salary: $80,000 × 15.3% = $12,240
- FICA on distributions: $0
Compare that to operating as a sole proprietor or single-member LLC:
- Self-employment tax on full income: $200,000 × 15.3% = $30,600
Annual savings: $18,360.
2026 Wage Base
The Social Security wage base for 2026 is $184,500. Once your salary exceeds this amount, you stop paying the 12.4% Social Security portion (6.2% employee + 6.2% employer). Medicare has no cap.
The IRS Requirement
Your salary can’t be artificially low. The IRS requires compensation that reflects what you’d pay an unrelated employee to do your job. Paying yourself $20,000 when comparable positions pay $80,000 is a red flag.
We cover this in detail in our S-Corp Reasonable Compensation Guide.
Maximizing Retirement Contributions
Retirement accounts offer one of the most powerful ways to shelter S-Corp income from taxes. The 2026 limits are higher than ever.
2026 Contribution Limits
| Plan Type | Limit |
|---|---|
| 401(k) employee deferral | $24,500 |
| Catch-up (age 50+) | $8,000 additional |
| Catch-up (age 60-63) | $11,250 additional |
| Combined limit (employee + employer) | $72,000 |
| SEP-IRA | Up to $70,000 (25% of compensation) |
Solo 401(k) Strategy
A Solo 401(k) lets you contribute as both employee and employer:
- Employee deferral: $24,500 (or more with catch-up)
- Employer profit sharing: Up to 25% of your W-2 compensation
Example: With a $100,000 salary, you could contribute:
- $24,500 as employee deferral
- $25,000 as employer contribution (25% × $100,000)
- Total: $49,500 sheltered from current taxes
Important Deadlines
- Employee 401(k) deferrals must be made by December 31
- Employer contributions can wait until your tax filing deadline (including extensions)
For the complete guide, see S-Corp Retirement & 401(k) Guide.
Section 179 and Depreciation Strategies
Equipment purchases offer immediate deductions when timed correctly.
2026 Section 179 Limits
- Deduction limit: Approximately $1,320,000
- Phase-out threshold: Approximately $3,290,000
- Bonus depreciation: 60%
How Section 179 Works
Section 179 lets you deduct the full cost of qualifying equipment in the year you purchase it, rather than depreciating it over time. This includes computers, software, machinery, furniture, and certain vehicles.
Vehicle Limitations
Heavy SUVs and trucks over 6,000 pounds GVWR get special treatment, but there’s a cap. The SUV limitation for Section 179 is approximately $30,500 for 2026. Vehicles under 6,000 pounds have lower limits under the luxury auto rules.
Critical Timing Rule
Equipment must be purchased AND placed in service by December 31. Ordering equipment on December 30 and receiving it January 5 means no deduction for 2026.
For complete details, see our Section 179 Deduction Guide.
Optimizing the QBI Deduction
The 20% QBI deduction is now permanent. But maximizing it requires understanding how your S-Corp salary affects the calculation.
The Basic Rule
You can deduct 20% of your qualified business income. For S-Corp owners, QBI is the income reported on your K-1, not your W-2 wages.
Higher salary = Lower QBI.
The W-2 Wage Limitation
Once your taxable income exceeds the threshold ($203,000 single / $406,000 MFJ), your QBI deduction may be limited by the W-2 wages paid by your business.
The limitation is the greater of:
- 50% of W-2 wages, OR
- 25% of W-2 wages + 2.5% of UBIA (unadjusted basis of qualified property)
Why This Creates a Balancing Act
Higher salary = more FICA taxes but higher wage limitation Lower salary = less FICA taxes but potentially limited QBI deduction
Example
$300,000 taxable income, $0 W-2 wages:
- Tentative QBI deduction: $60,000 (20% × $300K)
- W-2 wage limitation: $0 (50% × $0)
- Actual QBI deduction: $0
$300,000 taxable income, $120,000 W-2 wages, $180,000 QBI:
- Tentative QBI deduction: $36,000 (20% × $180K)
- W-2 wage limitation: $60,000 (50% × $120K)
- Actual QBI deduction: $36,000
Use our QBI Calculator to model different scenarios.
For the comprehensive guide, see Qualified Business Income Deduction Guide.
State Tax Strategies: PTET Elections
The Pass-Through Entity Tax election offers a workaround for the $40,400 SALT cap.
How PTET Works
Currently, 36 states offer some form of PTET election. The S-Corp pays state income tax at the entity level, then shareholders receive a credit for taxes paid. The entity-level tax is deductible without being subject to the SALT cap.
Who Benefits
PTET elections help owners who:
- Live in high-tax states
- Would otherwise hit the SALT cap
- Have significant pass-through income
Texas Considerations
Texas doesn’t have a state income tax, so there’s no PTET to elect. However, if you have income from other states or own S-Corps in states with income tax, the election may apply to those entities.
For Texas-specific guidance, see Texas CPA Firm.
S-Corp Tax Planning Calendar
Effective tax planning happens year-round, not just in December. Here’s when to focus on what:
| Quarter | Focus Areas |
|---|---|
| Q1 (Jan-Mar) | File Form 1120-S by March 15, distribute K-1s, make Q1 estimated payment (April 15), review prior year results |
| Q2 (Apr-Jun) | Mid-year tax projection, review salary level, make Q2 estimated payment (June 15), consider entity restructuring |
| Q3 (Jul-Sep) | Retirement contribution review, Q3 estimated payment (September 15), begin year-end planning |
| Q4 (Oct-Dec) | Final salary adjustments, equipment purchases, retirement deferrals, 401(k) deferrals by Dec 31 |
Key Deadlines for 2026
| Date | Action |
|---|---|
| January 15 | Q4 2025 estimated payment due |
| March 15 | Form 1120-S due, K-1s to shareholders |
| April 15 | Q1 estimated payment due |
| September 15 | Extended 1120-S due, Q3 estimated payment |
| December 31 | 401(k) deferrals, equipment placed in service |
For complete deadline information, see S-Corp Tax Deadlines & Filing Requirements.
Common S-Corp Tax Planning Mistakes
Avoid these errors that cost S-Corp owners money and create IRS problems:
1. Setting Salary Too Low
The IRS can reclassify distributions as wages and assess back payroll taxes, penalties, and interest. This is the most common S-Corp audit issue.
2. Missing Retirement Contribution Deadlines
401(k) employee deferrals must happen by December 31. Miss it, and you’ve lost the opportunity for that year.
3. Ignoring the QBI Wage Limitation
High-income owners who pay minimal salary may inadvertently eliminate their QBI deduction entirely.
4. Late Estimated Payments
Underpayment penalties apply when you don’t pay enough throughout the year. Safe harbor is 100% of prior year tax (110% if AGI exceeds $150,000).
5. Not Tracking Shareholder Basis
Distributions exceeding your basis are taxable as capital gains. Losses exceeding basis are suspended. Many owners don’t track this until it’s a problem.
Learn more about distributions in our S-Corp Distributions Tax Rules guide.
Frequently Asked Questions
How can I reduce my S-Corp taxes?
The primary strategies are: optimize salary vs. distributions to minimize FICA, maximize retirement contributions, use Section 179 for equipment purchases, and ensure you’re capturing the full QBI deduction. Year-round planning typically beats last-minute moves.
What is the best tax strategy for an S-Corp in 2026?
There’s no single “best” strategy. It depends on your income level, whether you’re subject to QBI limitations, your retirement savings goals, and your state tax situation. The combination of reasonable salary optimization and retirement contributions typically provides the largest benefit.
How much should I pay myself from my S-Corp?
Your salary should reflect what you’d pay an unrelated employee to perform your duties. This is based on market data, not a percentage of profits. The 60/40 rule you may have heard is a myth with no IRS basis.
What are the 2026 changes affecting S-Corps?
The QBI deduction is now permanent under the OBBBA. There’s a new $400 minimum QBI deduction. Section 179 limits increased. SALT caps rose to approximately $40,400. Bonus depreciation dropped to 60%.
When should I do S-Corp tax planning?
Year-round. October through December is critical for year-end moves, but mid-year projections catch problems early. Many tax planning opportunities require advance setup.
Is the QBI deduction permanent?
Yes. The One Big Beautiful Bill Act, signed July 4, 2025, made the Section 199A deduction permanent. The 20% deduction on qualified business income is no longer scheduled to expire.
Strategic Planning for 2026
The 2026 tax landscape offers S-Corp owners stability and opportunity. The permanent QBI deduction eliminates uncertainty. Updated limits provide more room for retirement contributions and equipment deductions.
The owners who benefit most are those who plan proactively. Salary optimization, retirement contributions, and QBI planning work together. Adjusting one affects the others. Getting the balance right requires looking at the full picture.
If you’re running an S-Corp and want to make sure you’re capturing every opportunity, schedule a tax planning assessment. We specialize in partnership and S-Corp taxation and can help you build a strategy that works for your specific situation.