The tax window for S-corp owners closes on December 31. Unlike sole proprietors, most S-corp year-end moves require payroll to run before the calendar flips.
Why December 31 Is the Hard Cutoff
The IRS applies FICA payroll taxes to W-2 wages. Distributions fall outside FICA entirely. That gap is why reasonable compensation matters: the IRS can reclassify underpaid distributions as wages and assess payroll taxes plus penalties. K-1 pass-through income is fully taxable for income tax purposes whether or not it is distributed. If you skip a year-end payroll or run it short, any January correction is considered 2027 income. Backdating payroll is not a legal fix.
Employee salary deferrals into a solo 401(k) also require payroll. The deferral must come through payroll by December 31. The employer contribution portion is more flexible and can follow on the tax filing deadline plus extensions, but the deferral window closes with the last payroll of the year.
Three Payroll-Dependent Moves for S-Corp Owners
Set Reasonable Compensation via Year-End Payroll
Run a catch-up payroll before December 31 to bring your W-2 wages to a reasonable level for the services you performed. The IRS has no specific formula, but bases its standard on what a comparable employee would be paid for the same work. A salary that is unreasonably low compared to distributions invites recharacterization of distributions as wages, plus payroll tax and penalties. Getting this right before year-end also sets the foundation for retirement contributions and QBI deduction planning.
Capture Solo 401(k) Employee Deferrals
Employee deferrals of up to $24,500 (2026 limit) must run through payroll by December 31. If you are ages 50 to 59 or 64 and older, the catch-up adds $8,000 for a total of $32,500. If you are ages 60 to 63, the SECURE 2.0 super catch-up allows $11,250 instead, for a total of $35,750. A new solo 401(k) plan must also be adopted (plan document signed) by December 31 for 2026 contributions. The employer profit-sharing contribution, up to 25% of W-2 wages, can follow on the return due date including extensions.
Add Health Insurance Premiums to Your W-2
A 2% shareholder-employee can deduct self-employed health insurance only if the premiums are included in W-2 Box 1 wages. Under IRS Notice 2008-1, the S-corp pays or reimburses the premiums, includes the amount in the shareholder's Box 1 wages, and the shareholder deducts the same amount as self-employed health insurance on Schedule 1 of the personal return. If the premiums are not reflected in the W-2, the deduction is disallowed. These premiums are exempt from FICA for 2% shareholders. Long-term care premiums qualify but are subject to age-based annual limits.
Accountable Plan Reimbursements Before Year-End
An accountable plan lets the S-corp reimburse you tax-free for legitimate business expenses, including home office (actual expense method), business mileage, cell phone, and internet. Reimbursements under a valid accountable plan are deductible by the S-corp and excluded from your W-2 income. Run any remaining 2026 reimbursements before December 31 and document the business purpose and amounts.
QBI Deduction: Does a Higher Salary Help or Hurt You?
The Section 199A QBI deduction lets eligible S-corp owners deduct up to 20% of qualified business income. For higher-income taxpayers above the phaseout threshold, the deduction is limited by the amount of W-2 wages paid. In that range, raising your W-2 salary increases the wage limitation, but it also reduces qualified business income dollar for dollar. The net effect depends on where your income falls within the phaseout range. If you are approaching or above the threshold, model both directions before finalizing payroll compensation.
Two More Items Before Year-End
- SEP-IRA: The S-corp can fund a SEP-IRA for 2026 up to the S-corp return due date, including extensions (September 15, 2027 with a six-month extension). No December 31 cutoff applies. The employer contribution is limited to 25% of the shareholder's W-2 wages.
- Q4 estimated taxes: S-corp income passes through to your personal return. If your K-1 income plus W-2 wages will push your total tax above the safe harbor, consider adding extra federal withholding on the December payroll. The safe harbor is 90% of this year's tax, or 100% of last year's tax (110% if prior-year AGI exceeded $150,000). Payroll withholding is treated as paid evenly throughout the year, which can reduce or eliminate underpayment penalties.
For background on how salary and distributions interact throughout the year, see S-Corp Salary vs. Distributions.
Have questions about year-end S-corp planning? Contact TS CPA for a free consultation. We respond within the same day.