5 Tax Strategies Every S-Corp Owner Should Know Before Year-End
1. Revisit your reasonable compensation — and write down why
The IRS requires S-corp shareholder-employees to take reasonable compensation for services performed before taking distributions. Set it too low and you invite reclassification, back payroll taxes, and penalties. Set it too high and you overpay FICA for no reason.
What makes this a year-end item is that your W-2 wage number quietly controls several other things:
Payroll tax exposure. For 2026, Social Security tax applies to the first $184,500 of wages; Medicare applies to all of it.
Your retirement contribution ceiling. Employer contributions to a company plan are based on W-2 wages (see #2).
The QBI deduction. Shareholder wages aren't qualified business income, but they do count toward the 50%-of-W-2-wages limitation — which matters once income clears the 2026 thresholds of $201,750 (single) or $403,500 (married filing jointly).
Documentation matters as much as the number. A short memo citing comparable market salaries, hours worked, and duties performed is far more persuasive than a number chosen after the fact.
Deadline: Your final payroll run of the year. Wages can't be backdated.
2. Fund the retirement plan — wages set the ceiling
For a profitable S-corp, this is often the largest single lever available. The 2026 numbers:
Item2026 limit401(k) elective deferral$24,500Catch-up, age 50+$8,000Catch-up, ages 60–63$11,250Total additions per participant (employee + employer)$72,000Compensation that can be counted$360,000
The employer piece is generally capped at 25% of W-2 compensation — another reason the salary decision in #1 comes first. An owner needs roughly $190,000 in wages to reach the full $72,000 between deferrals and the employer contribution.
Two things to watch:
The new Roth catch-up rule. Starting in 2026, if your prior-year FICA wages from the business exceeded $150,000, any catch-up contributions must go in as Roth. Those dollars are no longer a current-year deduction — plan the cash flow accordingly.
Plan setup timing. Deferrals generally require a salary deferral election in place before year-end. Employer contributions have more flexibility (up to the extended return due date), but the plan itself has to exist.
3. Get shareholder health insurance onto the W-2
This is the single most commonly missed S-corp item, and it costs real money.
If you own more than 2% of an S corporation, health insurance premiums paid or reimbursed by the company must be reported as wages in Box 1 of your W-2 — while being excluded from Social Security and Medicare wages (Boxes 3 and 5). Do that correctly and you claim the self-employed health insurance deduction on your personal return. Skip it, and the deduction is at risk.
Two practical notes:
The policy needs to be established by the corporation, or in your name with the corporation reimbursing you and reporting it properly.
Miss the December W-2 and the fix is a corrected W-2c — avoidable paperwork.
Deadline: Give your payroll provider the year-to-date premium total before the final December payroll.
4. Re-run the pass-through entity tax (PTET) math
Roughly 36 states plus New York City allow an S corporation to pay state income tax at the entity level. The entity deducts it as a business expense, sidestepping the individual state and local tax cap entirely — a structure the IRS blessed in Notice 2020-75, and one the One Big Beautiful Bill Act left intact for all pass-throughs, including service businesses.
What changed is the comparison. The individual SALT cap is $40,400 for 2026 — much higher than the old $10,000. It phases down for modified adjusted gross income above $505,000, but never below a $10,000 floor.
So the question isn't "should we do PTET" on autopilot. For some owners the higher personal cap now absorbs most of their state tax; for others — especially higher earners in the phase-down range — the entity-level election is still clearly better. It's worth actually running both.
Deadline: State-specific, and often unforgiving. Many states require the election and the payment by December 31 for the deduction to land in the current year.
5. Time December spending — and reimburse yourself properly
Two separate ideas that share the same deadline.
Equipment and assets. Section 179 expensing allows up to $2,560,000 in 2026, phasing out once purchases exceed $4,090,000. Separately, 100% bonus depreciation is back permanently for qualifying property acquired and placed in service after January 19, 2025. The operative words are placed in service — ordering a machine in December doesn't count if it isn't in use by the 31st.
A caution worth stating plainly: a deduction is not a discount. Buying equipment you don't need to save 25 cents on the dollar is still spending a dollar.
Accountable plan reimbursements. Employees can no longer deduct unreimbursed business expenses personally — which includes you as a shareholder-employee. A written accountable plan lets the corporation reimburse you for home office use, business mileage (72.5 cents per mile January–June 2026; 76 cents July–December), cell phone, and travel. The company deducts it; the reimbursement isn't taxable to you.
Deadline: Submit expense documentation and process the reimbursements before year-end so they land in the right tax year.
A quick year-end checklist
Reasonable compensation reviewed and documented
Final payroll scheduled with any wage true-up
Shareholder health premiums reported to payroll
Retirement plan established; deferral election signed
Roth catch-up requirement checked against prior-year wages
PTET election and payment evaluated against the $40,400 cap
Fixed assets placed in service, not just ordered
Accountable plan reimbursements submitted and paid
Most of these take an hour or two. Almost none of them can be done in April.
This article is general information current as of 2026 and is not tax advice. S-corporation rules interact heavily with your specific facts, state, and entity structure. Figures cited reflect published 2026 IRS limits and may change.