For many small and closely held businesses, an S corporation can provide significant tax advantages when it is structured and managed correctly. The biggest benefit is not necessarily a special deduction available only to S corporations. Instead, the tax savings often come from how income is classified, how the owner is compensated, which expenses are paid through the business, and how tax planning is completed before the end of the year.

An S corporation generally does not pay federal income tax at the corporate level. Instead, the corporation’s taxable income passes through to its shareholders, who report their respective shares on their individual income tax returns. This pass through structure can create valuable planning opportunities, particularly for profitable businesses.

Here are some of the most important tax saving strategies S corporation owners should consider in 2026.

Take a Reasonable Salary, but Understand the Importance of Distributions

One of the primary tax advantages of an S corporation involves payroll taxes.

An owner who actively works in an S corporation generally must receive reasonable compensation as an employee before taking distributions. The salary is subject to Social Security and Medicare taxes, while S corporation distributions generally are not subject to those employment taxes.

For example, assume an S corporation generates $250,000 of income before paying its owner. If reasonable compensation for the services performed by the owner is $120,000, the corporation could potentially pay the shareholder $120,000 as wages and distribute the remaining earnings as S corporation distributions.

The salary remains subject to payroll taxes, but the distributions generally are not.

This does not mean an owner can simply choose an artificially low salary. The IRS specifically requires reasonable compensation and can reclassify distributions as wages when an owner is underpaid. Factors include the owner’s responsibilities, training, experience, hours worked, services performed, compensation paid by comparable businesses, and the extent to which business revenue depends upon the owner’s personal services.

The goal is not to pay the lowest possible salary. The goal is to determine and document a salary that is reasonable based on the facts while taking advantage of the legitimate distinction between wages and S corporation distributions.

Use an Accountable Plan to Reimburse Business Expenses

An accountable plan is one of the most overlooked tax planning opportunities for S corporation owners.

Shareholders frequently pay expenses personally that are really business expenses. Examples can include business mileage, business use of a personal cell phone, travel expenses, supplies, professional subscriptions, and qualifying home office expenses.

Instead of leaving these expenses on the shareholder’s personal side, the S corporation can reimburse the shareholder under a properly established accountable plan.

Under IRS rules, the expense must have a business connection, the employee must adequately document the expense within a reasonable period, and any excess reimbursement must be returned to the employer. When these requirements are satisfied, the reimbursement generally is not included in the employee’s taxable wages and is not subject to employment taxes. The corporation receives the applicable business deduction.

For an S corporation owner who regularly pays legitimate business expenses personally, this can create meaningful tax savings while also keeping business and personal expenses properly separated.

Have the S Corporation Pay or Reimburse Health Insurance Correctly

Health insurance is another area where S corporation owners frequently miss deductions because the premiums are not handled properly.

Special rules apply to shareholders who own more than 2 percent of an S corporation.

Generally, the S corporation can pay the health insurance premiums directly or reimburse the shareholder for qualifying premiums. The premiums are then reported as taxable income in Box 1 of the shareholder’s Form W 2, but generally are not subject to Social Security and Medicare taxes when handled correctly.

The shareholder may then qualify for the self employed health insurance deduction on the individual tax return, subject to the applicable limitations.

The rules can also apply to qualifying Medicare premiums. IRS guidance specifically recognizes certain Medicare premiums when determining the self employed health insurance deduction.

Simply paying the insurance personally and forgetting to run it through the S corporation can result in a lost deduction.

Maximize Retirement Plan Contributions

Retirement plans can be one of the most powerful tax planning tools available to profitable S corporations.

For 2026, an employee generally can contribute up to $24,500 through a 401(k) plan. Individuals age 50 and older may qualify for additional catch up contributions. The general catch up amount for 2026 is $8,000, while a special $11,250 catch up limit applies to qualifying participants ages 60 through 63.

Employer contributions can increase the total retirement contribution substantially. For 2026, the general defined contribution plan limit is $72,000 before applicable catch up contributions.

A SEP IRA is another option. Employer contributions to a SEP can generally be made up to 25 percent of eligible compensation, subject to a maximum contribution of $72,000 for 2026.

The best retirement plan depends on the business owner’s income, age, number of employees, compensation levels, and how much the owner wants to contribute.

For highly profitable businesses, a 401(k) combined with a profit sharing component or even a defined benefit plan may create significantly larger deductions than a basic IRA.

Retirement planning should be reviewed before year end because some strategies require the plan to be established or certain payroll elections to be completed before the end of the tax year.

Take Advantage of the Qualified Business Income Deduction

The Qualified Business Income deduction, commonly called the QBI deduction or Section 199A deduction, continues to provide substantial savings for qualifying S corporation shareholders.

The deduction can potentially equal up to 20 percent of qualified business income.

The Working Families Tax Cuts legislation made the QBI deduction permanent rather than allowing it to expire after 2025.

However, the calculation becomes more complicated for higher income taxpayers.

For 2026, the applicable threshold begins at $403,500 for married taxpayers filing jointly and approximately $201,750 for most other taxpayers. Various wage, property, and specified service business limitations can apply once taxable income exceeds the applicable thresholds.

This creates an important planning opportunity.

Retirement contributions, timing of deductions, owner compensation, equipment purchases, and other strategies may affect taxable income and potentially affect the amount of QBI deduction available.

The interaction between reasonable compensation and QBI is particularly important because shareholder wages are not qualified business income. Paying unnecessarily high wages can therefore potentially reduce the QBI deduction in addition to increasing payroll taxes.

Reasonable compensation should always be determined based on the facts, but it should also be incorporated into the overall tax planning analysis.

Consider Equipment Purchases and 100 Percent Bonus Depreciation

Businesses planning major equipment purchases should carefully consider the timing of those purchases.

Current law provides permanent 100 percent bonus depreciation for qualifying property acquired and placed in service after January 19, 2025.

This can allow an S corporation to deduct the full cost of certain equipment in the year it is placed in service rather than depreciating it over several years.

Section 179 provides another valuable option.

For tax years beginning in 2026, the maximum Section 179 deduction is $2,560,000, with the deduction beginning to phase out when qualifying property placed in service exceeds $4,090,000.

This does not mean businesses should purchase equipment simply to generate a tax deduction. Spending $100,000 to save a fraction of that amount in taxes does not create economic profit.

However, if the business already needs computers, machinery, furniture, equipment, or other qualifying assets, the timing of the purchase can materially affect the current year’s tax liability.

Review Automobile Deductions Carefully

Vehicles are another major planning area for S corporations.

Depending on the vehicle and how it is used, the business may be able to deduct business mileage, actual operating expenses, depreciation, or a combination of allowable costs.

Larger qualifying vehicles may also be eligible for accelerated depreciation, although special limits apply to certain sport utility vehicles and passenger automobiles.

Personal use must be tracked carefully. When a corporation owns a vehicle that is also used personally by a shareholder or employee, the personal portion generally must be treated appropriately as a taxable fringe benefit.

Vehicle deductions can be significant, but they are also an area where poor record keeping creates unnecessary audit exposure.

Pay Family Members When There Is a Legitimate Business Purpose

Hiring a spouse or child can sometimes produce tax planning opportunities, but the employment must be legitimate.

The family member should perform actual work, compensation should be reasonable for the work performed, payroll and employment laws should be followed, and the business should maintain the same type of documentation it would maintain for any other employee.

Paying family members can potentially shift income within the family while also providing opportunities for retirement contributions and other employee benefits.

However, the rules that sometimes provide payroll tax advantages when children work for a sole proprietorship do not generally provide the same payroll tax exemption when the employer is an S corporation. This distinction is frequently overlooked.

Manage the Timing of Income and Expenses

Tax planning is not limited to deductions.

Depending on the business’s accounting method, an S corporation may have opportunities to accelerate deductible expenses or properly defer income between tax years.

For example, a business expecting significantly higher income this year than next year may benefit from accelerating planned deductible expenses into the current year.

The opposite may make sense if the owner expects to be in a significantly higher tax bracket next year.

Tax planning should therefore consider at least two years rather than focusing only on minimizing the current year’s taxable income.

Plan Before December 31

The biggest mistake S corporation owners make is waiting until tax preparation season to think about tax savings.

By the time the tax return is being prepared, many of the best planning opportunities are already gone.

Payroll has already been processed. Retirement contribution opportunities may be limited. Equipment purchases were either completed or postponed. Health insurance may have been handled incorrectly. Business expenses may have been paid personally without reimbursement. Estimated tax payments may have been missed.

Tax preparation reports what already happened.

Tax planning determines what should happen before the year ends.

A properly structured S corporation can provide substantial tax savings, but the entity itself is only the starting point. The greatest savings generally come from coordinating reasonable compensation, distributions, retirement contributions, health insurance, accountable plan reimbursements, depreciation, the QBI deduction, and the timing of income and expenses.

For business owners with meaningful profits, proactive planning throughout the year can make the difference between simply filing a tax return and actually managing the tax liability.

Tax laws are complex and depend heavily on each taxpayer’s circumstances. Business owners should review these strategies with their tax professional before implementing them, particularly when determining shareholder compensation, retirement contributions, depreciation elections, health insurance deductions, or state specific tax strategies.