Small Business Tax Planning When Your Income Jumps: What to Do Before Year-End
I recently spoke with a business owner whose company went from barely getting started to booming in about a year. It's the outcome every founder hopes for, but it also brought problems that weren't there before: a much bigger tax bill, questions about how to pay themselves, and financial decisions with real weight. Many of the most valuable tax moves have year-end deadlines, so the window to act is short. Here's what to focus on.
Don't get blindsided by your tax bill
If your business is an LLC, partnership, or S corporation, its profits generally flow through to your personal tax return, and no one withholds tax on them. You're expected to pay quarterly estimated taxes, generally due in April, June, September, and January.
Here's the trap. You can usually avoid an underpayment penalty by paying at least 100% of last year's tax, or 110% if last year's adjusted gross income was over $150,000 ($75,000 if married filing separately). After a slow year, that's easy to hit, but it only avoids the penalty. It doesn't reduce what you owe. Owners in a breakout year often pay the small safe harbor amount and then face a very large bill in April.
The fix: project this year's profit, estimate the tax, and move that money into a separate account as revenue comes in, so it isn't sitting in the operating account looking available.
Should you become an S corp?
The structure that made sense when you were making very little may be costing you now. By default, a single-member LLC is taxed like a sole proprietorship, so its net earnings are generally subject to self-employment tax: 15.3% up to the Social Security wage base and 2.9% above it, plus an additional 0.9% Medicare tax for higher earners.
Many profitable owners elect S corporation tax treatment instead. You pay yourself a reasonable salary through payroll and take the remaining profit as distributions, which aren't subject to Social Security and Medicare taxes. The trade-offs are running payroll, filing a separate business return, and setting a salary the IRS would consider reasonable for your role. For a calendar-year business, the election generally must be filed by March 15 to apply that year, though late-election relief is sometimes available. Run the numbers with your CPA first.
How to pay yourself from your business
A common misunderstanding: in an LLC, partnership, or S corp, you're generally taxed on your share of the profit whether you take the money out or leave it in the business. Leaving cash in the business doesn't defer the tax.
So the real question is how much to take out and in what form. Sole proprietors and partners take owner's draws. S corp owners take a salary plus distributions, and that split drives the payroll tax bill. Either way, pay yourself on a consistent schedule, keep business and personal accounts separate, and keep enough in the business for operating needs and upcoming taxes before distributing the rest. Fast growth often brings bigger payroll, inventory, or equipment needs that can drain cash faster than expected.
Use a retirement plan as a tax tool
For many owners, a retirement plan is the biggest deduction available, and it moves wealth out of the business and into your own name.
If you have no employees other than a spouse, a solo 401(k) is often the strongest option. In 2026, you can defer up to $24,500 as the "employee," plus catch-up contributions if you're 50 or older, and the business can add a profit-sharing contribution, up to a combined $72,000 before catch-up contributions. (source) A SEP IRA is simpler and can be set up and funded as late as your tax filing deadline, including extensions, but it allows only employer contributions.
Deadlines differ by plan type, and some decisions need to be made before December 31. Once you have employees, most plans have to include them, so choose with future hiring in mind.
Other tax strategies worth reviewing
The qualified business income (QBI) deduction: Many pass-through owners can deduct up to 20% of their qualified business income, and the 2025 tax law made this deduction permanent. (source) At higher incomes it phases down, and owners of service businesses like consulting, law, health care, and financial services can lose it entirely. Your S corp salary doesn't count as qualified business income, so the salary decision affects this deduction too.
Big purchases: Federal law now permanently allows 100% bonus depreciation for qualifying property acquired after January 19, 2025, so many purchases can be deducted in the year you buy them. New Jersey doesn't follow this rule, and a purchase only makes sense if you needed it anyway.
New Jersey's BAIT election: Eligible partnerships and S corps can elect to pay New Jersey income tax at the business level through the Pass-Through Business Alternative Income Tax. Owners get a credit on their New Jersey return, and the payment is generally deductible federally without counting toward the personal SALT cap. That cap is $40,400 in 2026 but phases down above $505,000 of modified adjusted gross income, so the election can still be valuable for high earners. (source)
Build wealth outside the business
A fast-growing business is also a concentrated, illiquid bet. If your entire net worth is tied to one company, a bad year for the business becomes a bad year for your family.
A strong year is the time to start separating the two: build a personal emergency fund, fund retirement accounts in your own name, invest outside the business, and keep your lifestyle from climbing as fast as revenue. More income and assets also raise the stakes on disability insurance, liability coverage, and an updated estate plan. If you have partners, a buy-sell agreement spells out what happens if one of you dies, becomes disabled, or wants out.
Get the right team in place
Good planning starts with clean books closed every month, since you can't project taxes or set a salary without knowing your real profit. You also want a CPA who plans proactively during the year, not just one who files after it ends, and a financial advisor who connects business decisions like how much to take out and which retirement plan to use with your personal goals.
The fourth quarter is the last chance to act on many of these moves for the current year. If your business has grown quickly, sit down with your team now, not next April.
Growing fast? Let's plan for it.
If your business has taken off, a few decisions made this quarter can shape your tax bill and your personal finances for years. Book a call to find out where you stand - there’s no obligation to work together. It’s free.
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About the author
Michael Walstedt, CFA, CFP®, is the founder of Reliant Wealth Advisory, a fee-only fiduciary firm in Hoboken, New Jersey. He helps business owners, executives, and professionals in the New York/New Jersey area, as well as nationwide, with financial planning and investment management.
This article is for educational purposes only and is not tax, legal, or investment advice. Tax laws, limits, and deadlines change, and the right strategy depends on your specific facts. Consult a qualified tax professional before making any changes to your business structure, compensation, or retirement plan.
