Tax Advisory for S-Corporation Owners

S-corp taxation creates unique optimization opportunities—and unique compliance requirements.

Unlike sole proprietors or partnerships, S-corp owners have to navigate reasonable compensation rules, payroll tax optimization, QBI deduction thresholds, and the balance between salary and distributions. Get these wrong, and you either overpay on self-employment taxes or underpay and risk an IRS challenge.

Tax advisory for S-corps isn’t just annual tax return preparation. It’s ongoing strategic guidance on the decisions that directly affect your tax bill: how much to pay yourself, when to take distributions, how to structure retirement contributions, and how to maximize the QBI deduction without triggering phase-outs.

Here’s what S-corp tax advisory includes—and why S-corp owners benefit from year-round planning more than most other entity types. (Note: While this guide focuses on S-corps, we also provide tax advisory for partnerships, C-corps, and Schedule C businesses.)

What Does Tax Advisory for S-Corp Owners Include?

Tax advisory for S-corporation owners focuses on four primary strategies: (1) reasonable compensation optimization (balancing W-2 salary vs distributions to minimize SE tax while staying IRS-defensible), (2) QBI deduction maximization (managing W-2 wage limitations and property requirements), (3) retirement contribution coordination (Solo 401(k), SEP-IRA, or defined benefit plans), and (4) distribution timing and planning. S-corp advisory costs $3,000-$8,000 annually depending on revenue and complexity. The most common optimization: adjusting reasonable compensation to maximize QBI deduction while maintaining defensible salary—often saving $5,000-$15,000 annually.

Key Takeaways

• Reasonable compensation is the #1 S-corp strategy – Too high kills QBI deduction, too low triggers IRS audit risk
• QBI deduction has W-2 wage limitations – Phase-out starts at $383,900 (2026), requiring careful salary/distribution balance
• Retirement contributions are tax-deductible – Solo 401(k) allows $70,000+ contributions for high-income S-corp owners (2026)
• Distribution timing matters – Coordinate with estimated tax payments and personal cash flow needs
• Basis tracking prevents surprises – S-corp distributions exceeding basis create taxable capital gains
• S-corp advisory saves $5K-$15K+ annually – Through reasonable comp optimization, QBI maximization, and retirement coordination

Why S-Corp Owners Benefit from Tax Advisory

S-corp taxation requires more active management than other entity types. The strategies aren’t complex, but they require annual recalibration as your income changes.

Reasonable Compensation Requires Annual Analysis

Every S-corp owner must pay themselves “reasonable compensation” through W-2 wages. Too low, and the IRS can reclassify distributions as wages, resulting in back taxes, penalties, and interest. Too high, and you pay unnecessary FICA taxes.

The defensible range changes every year based on:

• Your business revenue
• Profit margin
• Industry compensation data
• Time spent in the business
• Skills and expertise you bring

Without annual analysis, you’re either guessing (risky) or using last year’s number (potentially suboptimal).

For detailed guidance on determining your S-corp salary, see: S-Corp Reasonable Compensation Guide

QBI Deduction Optimization Requires Active Management

The Section 199A qualified business income (QBI) deduction can reduce your taxable income by up to 20%—but it’s subject to wage and property limitations that kick in above specific income thresholds.

For 2026, limitations begin at:

• $383,900 for married filing jointly
• $191,950 for single/head of household

Above these thresholds, your QBI deduction is limited by the greater of:

1. 50% of W-2 wages paid by the business, or
2. 25% of W-2 wages + 2.5% of qualified property

This creates a planning opportunity: The more W-2 wages your S-corp pays (to yourself and employees), the more QBI deduction you can claim. But W-2 wages also increase payroll taxes.

The optimal balance depends on your specific income level—and it changes as your income grows.

Calculate your QBI deduction with our tool: QBI Deduction Calculator

Payroll Timing Affects Deductions

When you pay your S-corp salary matters for tax planning:

Year-end salary planning:

• Increasing salary in Q4 boosts W-2 wages for QBI calculation
• Decreasing salary in Q4 reduces current year FICA taxes
• Bonus payments can be timed to optimize current vs. following year income

Retirement contribution timing:

• Solo 401(k) contributions based on W-2 wages
• Higher salary = higher contribution limit
• Salary must be paid before contribution deadline

Without year-round advisory, you’re making these timing decisions in isolation—missing the optimization opportunities that come from coordinating them.

Distribution vs. Salary Planning

S-corp owners have flexibility in how they extract profit from the business:

• Salary (W-2 wages): Subject to FICA taxes, but required for “reasonable compensation”
• Distributions: Not subject to self-employment tax, but don’t generate W-2 wages for QBI purposes

The optimal mix depends on:

• Your total income level (QBI threshold considerations)
• Whether you have employees (impacts QBI wage limitation)
• Reasonable compensation defensibility
• Retirement contribution goals

This isn’t a one-time decision. As your income grows, the optimal balance shifts.

Core S-Corp Strategies in Advisory Engagements

These are the foundational strategies included in most S-corp tax advisory relationships—not advanced tactics requiring separate fees, but ongoing optimization that happens throughout the year.

1. Reasonable Compensation Analysis and Documentation

What’s involved:

• Annual analysis of defensible compensation range
• Industry compensation data research
• Documentation of factors supporting your chosen salary
• Adjustment recommendations as business income changes

Typical annual value: $5,000-$10,000 in FICA tax savings compared to overpaying yourself

How advisory helps: We analyze your situation annually, provide a defensible range, and document the analysis. If the IRS questions your compensation, you have contemporaneous documentation—not retroactively created justification.

2. QBI Threshold Management

What’s involved:

• Tracking your income throughout the year relative to QBI thresholds
• Calculating whether W-2 wage limitations apply
• Recommending salary adjustments to maximize QBI deduction
• Coordinating income deferral or acceleration strategies if you’re near a threshold

Typical annual value: $3,000-$12,000 depending on income level and how close you are to phase-out thresholds

How advisory helps: We project your QBI deduction quarterly, alerting you if you’re approaching thresholds. If you’re near a phase-out, we can recommend strategies to stay below it (increase retirement contributions, defer income, accelerate expenses).

Learn more about optimizing the QBI deduction: QBI Deduction Planning Strategies

3. Augusta Rule Implementation

What it is: Section 280A allows you to rent your home to your business for up to 14 days per year. The rental income is tax-free to you, and the business deducts the rental expense.

Requirements:

• Must be legitimate business use (board meetings, strategic planning sessions, client meetings)
• Rental rate must be reasonable (comparable to similar spaces in your area)
• Must be documented (agenda, attendees, photos, rental agreement)

Typical annual value: $3,000-$5,000 in tax savings (assuming 12-14 days at $1,000-$1,200 per day)

How advisory helps: We help you document legitimate business uses, establish defensible rental rates, and maintain the paper trail the IRS requires if questioned.

4. Retirement Plan Optimization

Common retirement vehicles for S-corps:

• Solo 401(k): Up to $69,000 contribution limit for 2026 (employee + employer portions)
• SEP IRA: Simpler than 401(k), but lower contribution flexibility
• Simple IRA: For S-corps with employees

What advisory includes:

• Recommending the optimal retirement vehicle for your situation
• Calculating maximum allowable contribution based on your W-2 wages
• Coordinating contribution timing with salary payments
• Evaluating whether defined benefit plan makes sense for high-income owners

Typical annual value: $5,000-$15,000 in tax savings from maximizing retirement contributions

For detailed guidance on S-corp retirement planning, see: S-Corp Retirement & 401(k) Guide

5. Health Insurance Deduction Structuring

S-corp owners who pay their own health insurance can deduct premiums, but the rules are specific:

Requirements:

• S-corp must pay premiums (reimbursement to shareholder, or directly to insurer)
• Premiums must be included in shareholder’s W-2 as wages
• Shareholder deducts premiums on Form 1040 (not through the business)

Common mistake: Deducting health insurance as a business expense without adding it to W-2 wages. This doesn’t work—the IRS will disallow the deduction.

How advisory helps: We ensure health insurance is properly structured and documented from the beginning, avoiding the need to correct it later.

Learn more about health insurance for S-corp owners: S-Corp Health Insurance Rules

Advanced S-Corp Advisory Strategies

These strategies typically require additional analysis or implementation services beyond base advisory fees—but when they apply, they can deliver significant value.

1. FICA Tax Savings Through Proper Structure

The primary tax benefit of S-corp status is self-employment tax savings. By splitting income between W-2 wages (subject to FICA) and distributions (not subject to FICA), you save 15.3% on the distribution portion.

Example:

• S-corp profit: $250,000
• Reasonable compensation: $95,000 (subject to FICA)
• Distributions: $155,000 (not subject to FICA)

Self-employment tax saved: $155,000 × 15.3% = $23,715 compared to sole proprietorship

This isn’t an “advanced” strategy—it’s the core reason S-corp elections exist. But maximizing the benefit requires balancing reasonable compensation requirements against FICA savings.

2. Defined Benefit Plan Feasibility

For high-income S-corp owners ($300K+), defined benefit plans allow contributions far exceeding Solo 401(k) limits—sometimes $200,000-$300,000 annually.

When it makes sense:

• Consistently high income ($300K+ for several years)
• Age 50+ (contribution limits increase with age)
• Few or no employees (plan must cover employees meeting eligibility requirements)
• Multi-year commitment (plans typically run 5-10 years)

Implementation cost: $2,500-$5,000 setup + $1,500-$3,000 annual administration

Typical first-year benefit: $50,000-$100,000+ in tax savings (depending on contribution amount)

How advisory helps: We analyze whether your situation fits the profile, coordinate with actuaries for plan design, and help implement the plan before year-end.

3. Real Estate Professional Status Coordination

If you own rental real estate in addition to your S-corp, qualifying as a Real Estate Professional allows you to deduct rental losses against your S-corp income (not subject to passive activity limitations).

Requirements:

• 750+ hours annually in real estate activities
• More than 50% of your working time in real estate activities
• Contemporaneous time logs documenting hours

How advisory helps: We help you understand whether you can qualify, set up time tracking systems, and coordinate the necessary documentation.

Learn more about qualifying: Real Estate Professional Status

4. Multi-Entity Structuring

Some S-corp owners benefit from separating operating companies from real estate holdings:

Common structure:

• Operating S-corp: Runs the business
• Separate LLC (or multiple LLCs): Owns real estate, equipment, or intellectual property
• Rental arrangement: Operating S-corp pays market-rate rent to property LLC

Benefits:

• Asset protection (separate real estate from operating liability)
• Estate planning flexibility (different entities can have different ownership)
• Cost segregation opportunities (on real estate held in separate entity)

When it makes sense:

• You own valuable real estate used by your business
• You want to separate operating risk from real estate holdings
• You’re planning for eventual business sale (keeping real estate out of sale)

Implementation: Requires attorney involvement for entity formation and operating agreements

How advisory helps: We identify when the structure makes sense, coordinate with your attorney, and ensure proper documentation for IRS purposes.

S-Corp Advisory Pricing Considerations

S-corp advisory pricing varies based on complexity, service frequency, and whether advanced strategies are needed.

Factors That Affect S-Corp Advisory Pricing

Higher complexity (higher fees):

• Multiple entities
• Employees (adds payroll coordination and compliance)
• Multi-state operations
• Real estate holdings
• Advanced strategies (defined benefit plans, cost segregation)

Lower complexity (lower fees):

• Single S-corp
• No employees (owner-only)
• Single-state operation
• Straightforward income and deductions

Typical S-Corp Advisory Pricing

Base advisory services (reasonable comp analysis, QBI optimization, retirement planning, quarterly projections):

• Annual advisory: $3,500-$5,000 per year
• Quarterly advisory: $5,000-$8,000 per year

Return preparation (often discounted for advisory clients):

• S-corp return (Form 1120-S): $1,500-$2,500
• Personal return (Form 1040): $800-$1,500
• Combined discount for advisory clients: 15-25% off standalone pricing

Advanced strategies (priced separately):

• Defined benefit plan setup coordination: $3,000-$5,000
• Multi-entity restructuring: $2,000-$4,000
• Cost segregation studies: $4,000-$8,000 (depends on property value)

For a detailed ROI analysis, see: Is Tax Advisory Worth the Cost?

S-Corp Advisory Case Study

Here’s a realistic example of what S-corp advisory delivers in practice.

Client situation:

• Professional services business (consulting)
• $450,000 annual revenue
• $320,000 net profit
• 1 owner, no employees
• Previously paid $65,000 W-2 salary (likely too low for reasonable compensation)

Year 1 advisory work:

Q1-Q2: Prior year wrap-up and structure review

• Analyzed prior year returns
• Identified reasonable compensation was likely too low (audit risk)
• Recommended adjusting to $95,000 W-2 salary (defensible based on industry data)

Q3: Year-end planning session

• Projected current year taxes based on income through August
• Recommended strategies:
  • Increase salary to $95,000 (from $65,000) to ensure defensible reasonable comp
  • Establish Solo 401(k) with $30,000 contribution
  • Implement Augusta Rule (12 days, $14,400 tax-free income)
  • Optimize QBI deduction through salary/distribution balance

Q4: Implementation

• Client increased salary to reach $95,000 for the year
• Solo 401(k) established and funded before deadline
• Augusta Rule documented (board meetings, strategic planning sessions)
• Estimated payments adjusted

Results:

• Tax saved through structure optimization: ~$23,000 annually
• Advisory cost: $4,500 annually (quarterly advisory + discounted return prep)
• Net benefit: $18,500 (5.1x ROI)

Ongoing years:

• Continued annual optimization as income grows
• Proactive recommendations as tax laws change
• Quarterly check-ins to ensure strategies remain optimal

How S-Corp Advisory Works at SDO CPA

Our S-corp advisory approach focuses on the strategies that matter most for pass-through entity owners.

What’s included in S-corp advisory:

• Annual reasonable compensation analysis and documentation
• Quarterly tax projections updated as income changes
• QBI deduction optimization and threshold management
• Retirement contribution planning and coordination
• Year-end strategy recommendations (Augusta Rule, timing strategies)
• Direct CPA access for questions throughout the year
• Tax return preparation (1120-S and 1040) with advisory client discount

Service frequency options:

• Annual advisory: One comprehensive planning session (typically Q3) + return preparation
• Quarterly advisory: Four touchpoints per year aligned with estimated payment deadlines

Typical engagement:

• Initial consultation to understand your situation
• Proposal outlining service tier and estimated annual cost
• Quarterly or annual meetings as agreed
• Proactive outreach when planning opportunities arise

Ready to explore S-corp advisory? Schedule a consultation to discuss your situation.

Related Resources

For more on S-corp taxation and advisory:

• Tax Advisory Services – Overview of what tax advisory includes
• S-Corporation Tax Guide – Comprehensive guide to S-corp taxation
• S-Corp Tax Planning Strategies – Detailed strategies for S-corp optimization
• S-Corp Reasonable Compensation Guide – How to determine defensible salary
• QBI Deduction Guide – Understanding Section 199A
• Partnership Tax Advisory – Advisory for partnership owners

About SDO CPA: We specialize in tax advisory for S-corporation owners, combining Big Four expertise (EY, KPMG) with the accessibility of a focused practice. Our approach emphasizes proactive planning, transparent pricing, and direct partner access.

Schedule a consultation to discuss tax advisory for your S-corp.