In plain words
Owning a business changes how you’re taxed. You pay both halves of Social Security and Medicare tax, nobody withholds income tax for you, and you get access to deductions and retirement plans that employees don’t. Four ideas cover most of it.
1. The qualified business income (QBI) deduction. Owners of sole proprietorships, partnerships, LLCs and S corporations can often deduct up to 20% of their qualified business income. The 2025 tax law made this deduction permanent. For 2026:
- Below $201,750 of taxable income ($403,500 married filing jointly), most owners can take the full 20%, whatever the business.
- Above that, limits phase in until $276,750 ($553,500 joint). They depend on the wages your business pays and its property, and specified service businesses such as health, law, consulting and financial services gradually lose the deduction entirely.
- New from 2026: active owners with at least $1,000 of QBI get a minimum deduction of $400.
2. Self-employment tax. If you’re self-employed, you pay 15.3% on net earnings: 12.4% for Social Security up to the 2026 wage base of $184,500, and 2.9% for Medicare with no cap. An extra 0.9% Medicare tax applies above $200,000 ($250,000 joint). You can deduct half of self-employment tax.
3. Retirement plans. Owners can save far more than most employees.
| Plan | 2026 limits (key figures) |
|---|---|
| Solo 401(k) | $24,500 employee deferral, plus employer contribution, up to $72,000 total (catch-up on top: $8,000 at 50+, $11,250 at ages 60 to 63) |
| SEP IRA | Employer contribution up to 25% of pay (about 20% of net self-employment earnings), up to $72,000 |
| SIMPLE IRA | $17,000 employee deferral, plus required employer match or contribution |
| Defined benefit plan | Benefits up to $290,000 a year at retirement; contributions can be much larger than a 401(k) for older, high-earning owners |
4. Estimated taxes. You generally pay tax in four quarterly payments (April, June, September and January). Paying at least 100% of last year’s tax (110% if your income was over $150,000) usually avoids an underpayment penalty.
How it helps real people
These rules let a small business owner build wealth the way larger companies do. A plumber, designer or family restaurant owner can use the QBI deduction, a solo 401(k) and the right business structure to lower taxes and save more each year.
Some owners also use business-owned life insurance for key-person cover, executive bonus plans or buy-sell agreements, as tools inside a broader plan.
A worked example
Illustrative. Isabel is a single freelance graphic designer. In 2026 her net profit is $120,000.
| Step | Illustrative amount |
|---|---|
| Net profit | $120,000 |
| Self-employment tax (on 92.35% of profit) | about $16,955 |
| Deduct half of SE tax | –$8,478 |
| Solo 401(k) employee deferral | –$24,500 |
| Solo 401(k) employer contribution (about 20% of net earnings after the half-SE-tax deduction) | –$22,300 |
| Standard deduction | –$16,100 |
| Taxable income before QBI | about $48,600 |
| QBI deduction (20% of QBI after the related deductions, limited by taxable income) | about –$9,700 |
Her taxable income ends up near $38,900, mostly in the 12% bracket. She’s saving $46,800 for retirement in one year. Design work isn’t limited as a service business at her income level. These numbers are rounded and illustrative only.
Who it’s for
- Sole proprietors, freelancers and gig workers.
- Owners of partnerships, LLCs and S corporations.
- Side-business earners with a day job.
Who it’s not for
- Owners of C corporations, which pay their own 21% corporate tax and don’t use the QBI deduction.
- Anyone looking for complex structures without a licensed tax professional. Entity choice, S corporation salaries and plan design all carry rules and penalties.
Risks and trade-offs
- S corporation trade-offs. Paying yourself a salary plus distributions can cut self-employment tax, but the salary must be reasonable, and payroll adds cost.
- Retirement plan duties. Plans with employees must follow testing, coverage and filing rules. A solo 401(k) over $250,000 needs a yearly Form 5500-EZ.
- Cash flow. Large retirement contributions lock money away. Keep a business reserve.
- Law changes. Thresholds adjust yearly, and rules can change.
Common mistakes
- Missing quarterly payments, then facing a big bill and a penalty in April.
- Mixing business and personal money. Separate accounts make deductions easier to prove.
- Setting up a SEP when a solo 401(k) would let you save more, or the reverse if you have employees.
- Forgetting the 1099 change. From 2026, the general threshold for reporting payments to contractors rises from $600 to $2,000.
- Ignoring state rules, which may not follow federal deductions.
FAQs
Does the QBI deduction lower self-employment tax?
No. It reduces income tax only.
Can I have a solo 401(k) and a 401(k) at my day job?
Yes, but your $24,500 employee deferral limit is shared across both. Employer contributions to your solo plan are separate.
What counts as a specified service business?
Fields such as health, law, accounting, consulting, financial services, athletics and performing arts, plus businesses relying on the skill or reputation of the owner. Engineering and architecture are excluded.
Is an S corporation always better?
No. It can help once profit is high enough to cover a reasonable salary and payroll costs. A licensed professional can run the numbers.
Can I expense equipment?
Often. For 2026, Section 179 lets businesses expense up to $2,560,000 of qualifying equipment, phasing out above $4,090,000 placed in service.
Related strategies
- 2026 retirement contribution limits explained
- Planning on a variable income
- Section 162 executive bonus plans
- Key person insurance
Your next step
Ask VeraLife (/#ask) which retirement plan could let you save the most for your business income.
Education, not advice. Examples are illustrative. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency.