Taxes change a little every year, and those “little” changes can add up to real money. In 2025, the standard deduction and tax bracket thresholds went up, retirement plan limits shifted, and health account limits moved too. The IRS just released similar information for 2026.
If you own a small or mid-sized business — whether you’re a single-member LLC, a Partnership, or an S-Corp — these numbers shape how you set your paycheck, when you take profit, and how much you can save in tax-favored accounts.
This guide breaks down what changed, why it matters, and how to use these rules to keep more of what you earn — in simple language, with real examples and credible sources.
Why This Matters Now
Think of the tax code like a set of guardrails. Those guardrails shift a bit every year because of inflation. If you keep driving with last year’s map, you eventually bump the rails and lose money. But when you use the updated rules — adjusting your paycheck deferrals, setting your salary as an owner-employee, and timing income and deductions — those guardrails turn into a smooth lane that helps you build wealth.
In 2026, the biggest guardrails to pay attention to are the standard deduction, the bracket thresholds, the Social Security wage base, and the new limits for 401(k)s, IRAs, HSAs, and FSAs. The IRS releases these updates each fall, and knowing them early lets you design your year instead of reacting to it.
The Basic Frame: How Brackets and Deductions Work
Your standard deduction works like a coupon the IRS gives you before calculating your tax. That coupon is larger in 2026, which means a smaller portion of your income is exposed to tax. On top of that, the seven-bracket system — 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent — remains in place, but each bracket begins at a higher threshold. In practice, that means more of your income stays in the lower brackets compared with last year.
For W-2 earners, this may simply show up as a slightly bigger paycheck. For business owners, these same changes influence how much of your income you take as salary versus distribution and how aggressively you use tax-preferred accounts.
Entity Type Changes Your Playbook
Remember that an LLC is a legal structure, not a tax structure. A single-member LLC is usually taxed like a sole proprietorship, while a multi-member LLC typically follows partnership rules. Either of those LLCs can elect to be taxed as an S-Corp or C-Corp as well, and each choice changes how money flows and how payroll taxes apply.
If you’re operating as a sole proprietor or an LLC taxed as one, you don’t take a W-2 paycheck from your business — you pay income tax and self-employment tax on your net profit. But once you elect S-Corp status, everything changes. You now wear two hats: owner and employee. You pay yourself a reasonable W-2 salary, and any remaining profit can be distributed to you without the extra layer of payroll taxes. That split — salary versus distribution — is where strategy lives, and these 2026 updates help you fine-tune that number.
The Social Security Wage Cap and How It Shapes Salary
Social Security tax applies only to wages up to a certain annual cap known as the contribution and benefit base. The IRS adjusts this number each year. This matters more than most owners realize.
Here’s what that means in plain English. If your salary is set below the cap, every dollar of your pay is subject to both Social Security and Medicare tax. But if your reasonable salary is above that cap, the portion over the limit avoids the 6.2 percent Social Security tax, though it still faces Medicare tax. That doesn’t mean you should underpay yourself — it simply shows why coordinating your salary with this annual cap helps you avoid unnecessary payroll tax.
Retirement Plans: The 401(k) Engine for Owners
Retirement plans do two things at once: they reduce today’s tax bill and grow tomorrow’s wealth. And 2026 comes with larger limits that owners should pay close attention to.
For 2026, employee deferrals into a 401(k), 403(b), most 457 plans, and the Thrift Savings Plan rise to $24,500. The catch-up contribution for people age 50 and older increases to $8,000, and the “super catch-up” available to employees age 60–63 remains at $11,250. On top of that, the overall limit for total 401(k) contributions — combining what you put in as the employee and what your company adds as the employer — rises to $72,000.
Instead of listing these as bullet points, here’s what they mean for you: an owner-employee can now defer more of their paycheck than ever before, save more aggressively inside the business’s retirement plan, and take advantage of a higher total ceiling that continues to climb with inflation. This is one of the reasons many owners choose an S-Corp paired with a well-designed 401(k) plan — the structure allows both high personal deferrals and meaningful employer contributions.
IRAs, HSAs, and FSAs — Medical and Personal Savings That Cut Tax
IRAs also get an update in 2026, with the contribution limit increasing to $7,500 and the catch-up contribution rising to $1,100. Income phase-outs for traditional IRA deductibility and Roth IRA eligibility also move higher. If you’re debating between pre-tax and Roth, remember the simple rule: if your current tax bracket is higher than the one you expect in retirement, pre-tax contributions often win. If your current bracket is low compared to where you’ll be later, Roth dollars may be more valuable.
Medical accounts rise as well. HSAs remain one of the strongest tax tools available because contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free. Meanwhile, the health FSA salary-reduction limit increases to $3,400. These may seem like small adjustments, but they add up — especially for owners who combine strategic payroll with medical planning.
Common Traps and How to Avoid Them
Most mistakes happen because owners rush or rely on outdated numbers. For example, some S-Corp owners set their salary too low in hopes of reducing payroll tax, not realizing that “reasonable compensation” is a documented process, not a guess. Setting it too low increases audit risk.
Another trap appears when owners wait until December to set up or fund their retirement plans. Many 401(k) and profit-sharing plans have deadlines throughout the year — not just in December — and missing those deadlines can reduce or eliminate the deduction you were counting on.
A third issue comes up when people focus only on the employee deferral amount. If you max out at $24,500 but forget that the overall limit is $72,000, you may miss out on employer contributions that could have delivered large additional deductions.
And finally, the end-of-year scramble almost always costs owners money. The best results happen when you update payroll deferrals at the start of the year, review cash flow mid-year, and confirm everything in the fall. Planning in small steps always beats December emergencies.
A Simple Year-Round Rhythm
Good tax planning isn’t hard — it’s consistent. Start the year by setting your paycheck deferral so you hit the 2026 target by December. As an owner-employee, pair your salary with the Social Security cap and your actual workload. In the spring and summer, review cash flow and decide whether to increase employer contributions. In the fall, review capital-gains plans, harvest losses where appropriate, and finalize medical-benefit elections. Then, as December approaches, make any final adjustments to bonuses, distributions, and estimated taxes so nothing surprises you.
What Good Strategy Looks Like
Good strategy is simple, legal, and documented. You choose the right entity, pay yourself fairly, chose the correct 401(k), IRA, HSA, and FSA limits the IRS gives you. Next, time the big income events so they land in the best bracket… and you keep the entire plan written down and up to date.
When you do that, the numbers start working for you. A larger standard deduction means more take-home pay. Higher retirement-plan limits mean larger deductions or more tax-free growth. The Social Security cap allows you to fine-tune your salary with precision instead of guessing. And over time, these steady moves turn tax savings into working capital for your business and your life.
Ready to Put This to Work?
You don’t need to memorize every IRS rule. You need a plan that fits your goals and your business. If you’d like a second set of eyes on your numbers, I’m happy to help you map a clear, legal, step-by-step path to keep more in 2026 and beyond.
Welcome to the New Age of Accounting. Let’s begin.
P.S. If you found this article helpful, you’ll love my new book S-Corp Mastery: How Smart Business Owners Maximize Tax Savings & Build a Lasting Legacy. It’s now live and available in a sleek, easy-to-read PDF version. Grab your copy here
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
