Small Business Financial Planning Guide

An honest framework for the decisions at hand. Not tax or investment advice — your specifics matter.

Retirement plan selection

• Solo 401(k): best for solo practitioners or owner-only + spouse businesses. Highest contribution limits, allows Roth 401(k), Mega Backdoor Roth possible.
• SEP-IRA: simpler setup, but employee contributions not possible (employer-only). If you add employees, you must contribute equally for them.
• SIMPLE-IRA: best for 5-50 employee businesses. Lower contribution limits than 401(k) but no annual compliance testing.
• Cash Balance Plan: defined-benefit on top of 401(k). Can shelter $100-300K additional for high earners 45+. Requires actuary.

S-corp reasonable salary

• S-corp distributions escape self-employment tax (15.3% on first $168,600 of wages in 2026; 2.9% + 0.9% Medicare after) — but only on distributions, not salary.⁵
• IRS requires "reasonable compensation" for owner-employees (Rev. Rul. 74-44, Watson v. Commissioner). Too-low salary triggers audit risk and recharacterization; too-high salary wastes the SE-tax benefit.
• Benchmark data: Bureau of Labor Statistics OEWS, industry compensation surveys. For most professional services, 40-60% of net profit as salary is defensible.
• Document the salary decision annually with comparable-salary data. Audit defense, not a theoretical exercise.

QBI deduction (Section 199A) optimization

• Up to 20% deduction of qualified business income for pass-through entities (IRC § 199A). OBBBA (July 2025) made this deduction permanent and expanded phase-out ranges.¹
• 2026 thresholds: phase-outs begin at $203,000 single / $406,000 MFJ. Phase-out range: $203K–$278K single / $406K–$556K MFJ (widened by OBBBA from the previous $50K/$100K ranges to $75K/$150K).²
• Above the phase-out, QBI is limited to the greater of 50% of W-2 wages OR 25% of W-2 wages + 2.5% of qualified property.
• SSTBs (Specified Service Trades or Businesses) — health, law, consulting, financial services, accounting, actuarial, performing arts, athletics — face complete disallowance above the phase-out (before OBBBA widened the range).
• OBBBA 2026 minimum: $400 QBI deduction available for taxpayers with QBI over $1,000.
• Strategies: bunching deductions (charitable, SALT), increasing retirement contributions to stay within phase-out, cost-segregation studies, income-recognition timing.

Health insurance and HSAs

• Self-employed health insurance premium deduction (IRC § 162(l)): above-the-line deduction — reduces AGI.³
• HSA 2026 limits: $4,400 self-only / $8,750 family + $1,000 catch-up at 55+. HDHP minimum deductible $1,700 self / $3,400 family; out-of-pocket max $8,500 / $17,000.⁴ Triple tax-advantage (deductible contribution + tax-free growth + tax-free qualified medical withdrawals).
• Most underused tax-advantaged account for self-employed. Pay current medical bills out of pocket; invest HSA for future retirement healthcare (qualified expenses; after 65 non-medical withdrawals taxed as ordinary income).

Irregular income smoothing

• Consulting/freelance income volatility is the #1 financial-planning challenge for self-employed.
• Build a 12-month expenses buffer before aggressive investing. Short-term Treasury or money market.
• Quarterly estimated taxes: build these from a dedicated 'tax account' (25-35% of every invoice sweep). Avoid year-end surprises.
• Down-year advantage: lower-income years are Roth conversion years, AMT-planning years, qualified-dividend-harvesting years.

W-2 to 1099 transition

• Year-one checklist: establish entity (LLC+S election often right), open business accounts, set quarterly estimated taxes, choose retirement plan, get own disability + health insurance, price services at 2x+ what you earned W-2 (to cover SE tax + benefits + unpaid-time).
• The number one mistake: pricing hourly rate at W-2 hourly rate. Your 1099 rate needs to cover ~30-50% additional overhead.

Sources

1. IRC § 199A — Qualified Business Income Deduction. Made permanent by OBBBA (July 2025).
2. Warren Averett — OBBBA Breakdown: QBI Deduction. 2026 thresholds + $400 minimum for QBI > $1,000.
3. IRC § 162(l) — Self-Employed Health Insurance Deduction.
4. IRS Rev. Proc. — 2026 HSA/HDHP Limits ($4,400 / $8,750).
5. SSA — 2026 Social Security Wage Base ($168,600). S-corp reasonable compensation: Rev. Rul. 74-44; Watson v. Commissioner (8th Cir. 2012).
6. IRS — Solo 401(k) Rules. 2026 limits: $24,500 employee + $8,000 catch-up 50+; combined $72,000.

Small-business planning verified against IRC and IRS 2026 publications. OBBBA made QBI permanent and widened phase-outs. Consult CPA for entity-specific strategy.