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How to Save on Taxes as an Entrepreneur: 4 Strategies + 2 Bonuses (2026)

Simple, high-impact ways entrepreneurs lower their tax bill, whether you're self-employed or run a small business: maxing out retirement, deducting health insurance, timing income and expenses, and the S corp election, plus the Augusta rule and hiring your kids.

By Megan Mahoney, founder of PrioritySaveUpdated November 202613 min readEducation, not tax advice

A lot of entrepreneurs overpay on taxes simply because they didn't plan ahead. That's true whether you're self-employed, a solopreneur, or a business owner with a team. This isn't about moving to Puerto Rico or anything extreme. These are simple, boring, high-impact strategies worth knowing about before tax season, picked because they have the biggest payoff for the least effort.

They aren't one-size-fits-all. How much each one saves depends on your profit, your business structure, and whether you have employees. The first four apply to most people; the last two are bonuses that only fit some situations.

1. Max out your retirement contributions

Every dollar you put into a pre-tax retirement account is subtracted from your taxable income. If you have $100,000 of taxable income and contribute $20,000 pre-tax, you're taxed on $80,000.

Single filer, 2026 bracketsFederal income tax
$100,000 taxable income, no contribution$16,712
$80,000 after a $20,000 pre-tax contribution$12,312
Saved$4,400 (the $20,000 was taxed at 22%)

A Roth contribution works the other way. You're still taxed on the full $100,000 this year, but the contribution grows and comes out tax-free in retirement. At 7% a year for 30 years, $20,000 could grow to about $152,000, all tax-free.

Either way, retirement accounts beat a regular brokerage account for taxes. A brokerage account usually gives no deduction on what you put in, and its growth doesn't compound tax-free the way a Roth account's does.

Which retirement plan: Solo 401(k), SEP IRA, or safe harbor 401(k)?

No employees: the Solo 401(k)

If you're self-employed with no full-time employees other than a spouse, the Solo 401(k) is designed for you, with a $72,000 contribution ceiling in 2026 (with some nuances). Read the full breakdown in What Is a Solo 401(k)?

With employees: the SEP IRA

A SEP IRA is simple to set up, but there's a catch: whatever percentage of pay you contribute for yourself, you have to contribute the same percentage for every eligible employee.

Say you pay yourself $150,000 and contribute 20%, or $30,000. You have two employees earning $50,000 each, so you owe them 20% too: $10,000 each, $20,000 combined. That $20,000 is still a deductible business expense, so the real cost is $20,000 minus what the deduction saves you. And it's money that helps keep good employees, which most deductions don't do.

With employees: the safe harbor 401(k)

A safe harbor 401(k) flips the ratio. Instead of matching your percentage, you owe employees a small base contribution, usually about 3% to 4% of their pay. For the two employees above, that's about $3,000 to $4,000 instead of $20,000. Add profit sharing, and you can push your own contribution much closer to $72,000.

Your contributionSaved at a 22% rate
$30,000 (the SEP IRA example)About $6,600
$72,000 (safe harbor + profit sharing)About $15,800

That's about $9,000 more saved, for less than half of what the SEP would have cost in employee contributions. The trade-off is that a safe harbor plan costs a few thousand dollars a year to administer.

2. Deduct your health insurance premiums

Self-employed people can generally deduct health insurance premiums straight off their income, even without itemizing.

  • At $150,000 in profit, you're likely in the 22% bracket. A $7,200 individual premium saves roughly $1,580.
  • At $300,000 in profit, you could be in the 32% bracket. An $18,000 family premium saves closer to $5,800.

Sole proprietors and partners claim it against their net self-employment income. S corp owners have one extra step: the corporation has to pay or reimburse the premiums and include them in the owner's W-2 wages. Skip that step and the deduction is lost, even though the premium is the same.

3. Time your income and expenses around year-end

How much tax you owe depends on which bracket your total profit lands in. If you're close to the edge of a bracket, moving income or expenses between December and January can change your bill.

2026 rate (single)Taxable income
10%Up to $12,400
12%$12,401 to $50,400
22%$50,401 to $105,700
24%$105,701 to $201,775
32%$201,776 to $256,225
35%$256,226 to $640,600
37%Over $640,600

Say you're a single filer on track for about $100,000 of taxable income, and a client offers a $20,000 bonus in late December. That pushes you to $120,000.

  • Take it in December: the first $5,700 is taxed at 22% and the remaining $14,300 at 24%, for about $4,686 in tax on the bonus.
  • Take it in January: if next year isn't also near a bracket edge, the whole $20,000 is taxed at 22%, about $4,400.

That's a $286 difference just from timing, and it grows with bigger amounts. The same logic works in reverse for expenses: buying equipment or paying a bill in December moves the deduction into this year.

4. Elect S corp tax treatment (in the right situation)

The S corp election mainly makes sense once you're consistently clearing roughly $80,000 to $100,000 in profit, though the real number depends on your state and your salary. Below that, setup and running costs usually eat most of the benefit.

How it saves on self-employment tax

As a sole proprietor, partnership, or default LLC, every dollar of profit gets hit with self-employment tax, generally 15.3%. With an S corp, you split your pay into a salary and a distribution. The salary still pays Social Security and Medicare through payroll, but the distribution skips that 15.3%.

ProfitTypical yearly savings
$150,000About $2,600 to $8,200
$300,000About $8,000 to $19,600

The range depends on how the salary-to-profit split is set.

The second reason: the QBI deduction

The qualified business income (QBI) deduction can take up to 20% off your taxable business income, and it applies when you file. But once taxable income passes about $200,000 for a single filer, the deduction starts to be capped based on the W-2 wages your business pays.

A self-employed person with no employees and no salary has no wages, so the deduction can shrink to almost nothing. A sole proprietor at $300,000 in profit sees a roughly $56,900 deduction cut to about $6,300.

The salary an S corp pays rebuilds that wage base. With a reasonable salary, the deduction comes back to roughly $40,000. It doesn't return to the full amount, because the salary itself also lowers qualified business income; at this profit level the most it comes back to is about $42,000.

  • If you already have employees on payroll, you're usually already covered.
  • The exception is a specified service business, like consulting, coaching, or financial advice, where the deduction disappears above the threshold, S corp or not.

Two things to watch out for

  1. Don't lowball the salary. The IRS audits reasonable salary. Paying yourself $15,000 a year while the business makes millions can mean back payroll taxes and penalties.
  2. It's not easy to undo. If you revoke S corp status, the IRS generally won't let you elect it again for five years without special approval. Make sure your business is stable above the threshold first.

To compare the structures with your own numbers, try the free sole proprietor vs. LLC vs. S corp calculator.

Bonus 1: The Augusta rule

A business can rent the owner's home for up to 14 days a year, for things like board meetings or planning sessions. The rent is tax-free to the owner and deductible to the business, as long as it's a real, comparable local rate. For example, 10 days at $150 a day is $1,500, tax-free.

Who it works for: the business has to be a separate taxpayer, like an S corp, C corp, or partnership. It doesn't work for a sole proprietorship or single-member LLC, because there's no separate business to pay the rent.

Bonus 2: Hiring your kids

If your kids do real work for your business, paying them can shift income into their lower bracket. Say you pay your teenager $8,000 this year to manage your social media:

  • Your business deducts the $8,000. In the 22% bracket, that's $1,760 off your tax bill.
  • A dependent's standard deduction is their earned income plus $450, so on $8,000 earned it covers about $8,450. They owe no federal income tax on it.
  • So the same $8,000 is taxed once at 0% instead of once at 22%.

Where structure matters

Business typeSocial Security and Medicare (FICA) on the $8,000
Sole proprietor, or a partnership owned only by the child's parents (child under 18)Fully exempt: $0
S corpNormal 15.3%: about $1,224 ($612 paid by the business, $612 withheld from your child's pay)

The income tax savings are the same either way. The work has to be real, the pay reasonable, and the records (timesheets, a job description, payroll) in place.

Recap

  1. Max out your retirement contributions.
  2. Deduct your health insurance premiums.
  3. Time your income and expenses around year-end.
  4. Elect S corp tax treatment, when the numbers work.
  5. Bonus: the Augusta rule (separate-entity businesses only).
  6. Bonus: hiring your kids.

These don't cover the everyday business deductions. For those, read 10 Tax Deductions Business Owners Should Know About.

Frequently asked questions

What is the best way for an entrepreneur to lower taxes?

For many entrepreneurs, retirement contributions are the biggest lever. Every dollar in a pre-tax retirement account comes off your taxable income. A Solo 401(k) allows up to $72,000 in 2026 if you're under 50, and owners with employees can use a SEP IRA or a safe harbor 401(k). At a 22% rate, a $20,000 pre-tax contribution saves about $4,400 in federal income tax.

At what profit does an S corp election start to make sense?

It mainly makes sense once profit is consistently around $80,000 to $100,000 or more, though the real number depends on your state and your reasonable salary. Below that, payroll, an extra tax return, and a smaller QBI deduction often eat most of the savings.

Can a sole proprietor use the Augusta rule?

No. The Augusta rule involves renting your home to your business, which only works when the business is a separate taxpayer, like an S corp, C corp, or partnership. A sole proprietorship or single-member LLC can't rent from its own owner.

Is health insurance tax deductible for self-employed people?

Generally yes. Self-employed people can usually deduct premiums for health, dental, and long-term care insurance for themselves and their family, as long as the business has a profit and they weren't eligible for an employer's plan. It lowers income tax but not self-employment tax.

What are the 2026 tax brackets for single filers?

10% up to $12,400; 12% up to $50,400; 22% up to $105,700; 24% up to $201,775; 32% up to $256,225; 35% up to $640,600; and 37% above that. The 2026 standard deduction for a single filer is $16,100.

This article is general education, not tax, legal, or financial advice for any one person. Tax rules change and depend on your situation, so check the details with a CPA or tax professional before making changes. Figures are for the 2026 tax year unless noted.