Tax Strategy Consulting for Business Owners in Austin

A tax strategy for business owners in Austin starts from a local fact that most owners know but almost none plan around properly. Texas imposes no personal income tax, so the planning conversation moves almost entirely onto the federal return and onto the entity level Texas franchise tax reported to the Texas Comptroller. That single difference reshapes the math. An owner in a high tax state burns much of the year chasing state deductions and residency questions. An Austin owner does not. Federal levers carry nearly all of the weight here, which makes entity choice and owner compensation the two places where real money moves. The franchise tax still deserves attention, because it applies at the entity level even in a year when the owner personally owes the state nothing.

The work begins with how the business is taxed. A single member LLC defaults to sole proprietor treatment, reported on Schedule C with self employment tax computed on Schedule SE. Every dollar of profit carries the 15.3 percent self employment rate up to the Social Security wage base. An S corporation election filed on Form 2553 splits profit into wages and distributions, and only the wage portion carries payroll tax. The IRS overview of business structures lays out the choices without telling you which one fits your numbers. That part takes arithmetic against your actual profit, not a rule of thumb borrowed from a podcast.

Here is how it plays out. Take an Austin design studio with 120,000 dollars of net profit. As a sole proprietorship, roughly 110,000 dollars of that runs through Schedule SE at 15.3 percent, landing near 16,800 dollars of self employment tax. Run the same profit through an S corporation paying a defensible wage of 70,000 dollars, and payroll tax applies to the wage alone, close to 10,700 dollars. The remaining 50,000 dollars of distribution avoids payroll tax, a saving of about 6,100 dollars. Layer a solo 401(k) deferral of 12,000 dollars on top of that wage and the federal bill drops again. Plan limits and the rules behind them sit in Publication 560.

Timing is the second lever. Placing equipment in service before December 31 and claiming depreciation on Form 4562 pulls the deduction into the current year rather than the next one. The qualified business income deduction reported on Form 8995 can remove up to 20 percent of pass through income from the tax base, but it phases out at higher taxable income and leans on W-2 wages paid, which ties it straight back to the salary decision. These pieces are not separate projects. They move together, and changing one without testing the other is how owners quietly lose money. Our tax strategy consulting work models the combinations before the year closes rather than after.

The common mistake is the one-way S election. An owner reads a headline about payroll tax savings, files Form 2553, then pays a token salary of 12,000 dollars against 200,000 dollars of profit. That is not planning, it is an invitation, and it also shrinks the wage base the QBI deduction depends on. The other frequent miss is treating the books as an April chore. Strategy runs on numbers, and numbers come from bookkeeping that closes every month. Owners who set the structure early and revisit it each fall keep more of what the following year produces.

The S corporation bargain is simple to state and harder to live with. You may split profit between wages and distributions, but the wage has to be reasonable pay for the work you actually do. The IRS expects owner employees who provide services to take compensation before distributions. Form 1120-S reports the entity picture and Form W-2 reports the wage. Payroll returns follow on Form 941 each quarter and Form 940 once a year. Skip the payroll and the election still exists, but the return tells an examiner that nothing was paid.

Reasonable is a facts test, not a percentage. The question to answer is what you would pay an outsider to do your job. An Austin general contractor who runs estimating and supervises crews is not a 30,000 dollar employee. A mostly passive owner who signs a lease twice a year is not a 150,000 dollar employee. Comparable pay data and the hours you genuinely work drive the answer. The IRS discussion of employment taxes explains the employer side of the obligation you take on the moment you put yourself on payroll, including the deposit schedule that starts immediately. The IRS does not publish a magic percentage for owner wages, and any adviser who quotes you one is guessing at your facts. What holds up under review is a figure you can explain by reference to what the role pays in the Austin labor market, backed by a note in the file showing where that comparison came from.

Run the numbers. An Austin marketing agency clears 160,000 dollars of profit. The owner sets a wage of 90,000 dollars, leaving 70,000 dollars as distribution. Payroll tax on the wage is roughly 13,770 dollars across the company side and the employee side. Had the owner stayed a sole proprietor, self employment tax on the full profit would have run close to 22,600 dollars. The gap is near 8,800 dollars. Now push the wage down to 12,000 dollars to chase a bigger saving and two things happen at once. Payroll tax drops, and so does the QBI deduction that leans on wages, and the position becomes hard to defend if anyone asks how a person running a full agency earned that little.

A sound tax strategy for business owners in Austin treats the salary figure as a supported range rather than a number picked to hit a target. Write down the comparables you used. Keep the payroll records where you can find them. Revisit the figure when the business changes, because a wage set in a 60,000 dollar year does not fit a 400,000 dollar year. Owners who want that number tested against their own facts can Request Private Consultation before the next payroll run, and it is worth doing while there is still room to adjust the year.

The mistake we see most often around Austin is the owner who takes distributions all year, then books one December payroll to catch up. That creates late deposit penalties and a W-2 that does not match how the money actually moved. Another is forgetting that the S corporation issues a K-1 that has to land on your individual tax return, and that the two filings have to agree. Set the wage with support now and build the payroll rhythm around it, and every other piece of the plan gets easier to hold together over the next four quarters. Our tax strategy consulting group revisits the figure each year rather than setting it once and forgetting it.

Equipment timing is the lever owners reach for first and pull at the wrong moment most often. The rule that governs it is placed in service, not paid for. A truck ordered on December 20 and delivered on January 4 gives you a deduction in the following year, not the one you were trying to fix. Publication 946 covers how depreciation works, and the deduction itself is reported on Form 4562. Section 179 and bonus depreciation both let you pull the write off forward, but they are different rules with different limits and they behave differently in a loss year.

Section 179 lets you expense qualifying property up to an annual cap, and it cannot create or increase a loss from the business. Bonus depreciation can create a loss, and it applies automatically unless you elect out of it. That distinction matters more in Austin than owners expect. With no Texas personal income tax, there is no state deduction to preserve and no state benefit to time around. The only real question is which federal year the deduction does the most good, and the answer depends entirely on the bracket you land in and the profit you expect next year. Owners in high tax states often have to time a purchase against two sets of rules at once, federal and state, because the two systems allow different amounts in the first year. That complication does not exist here, which is one of the quieter advantages of running a company in Texas.

Work an example. An Austin landscaping company buys a 60,000 dollar machine and places it in service on December 15. Full expensing under Section 179 drops taxable income by 60,000 dollars this year. At a 24 percent marginal rate, the cash effect runs roughly 14,400 dollars. Spread the same asset over five years instead and the first year deduction is closer to 12,000 dollars, worth about 2,880 dollars in tax. The total deduction is identical across the life of the asset. Only the timing changed, which is the entire point of the exercise and the reason the decision belongs in a projection rather than in a showroom.

The timing question cuts both ways. If this year is unusually thin and a large contract is already signed for next year, taking the full write off now wastes it against a low bracket. Deferring the purchase or electing out of bonus can be worth more. Income timing works on the other side of the ledger too. Holding an invoice until January or pulling a collection into December shifts profit between years, and cash basis taxpayers have real room here under Publication 538. Our tax strategy consulting team runs this projection in the fall, while there is still time to act, and it depends on bookkeeping that is current through the third quarter.

The mistake is buying something you do not need for a deduction you do not benefit from. Spending 60,000 dollars to save 14,400 dollars is a 45,600 dollar decision unless the asset earns its keep. The second mistake is forgetting recapture. Sell that machine later and Form 4797 can pull part of the deduction back as ordinary income, which surprises owners who thought the write off was final. Set a purchase calendar in October instead of a panic in December, and you get both the deduction and the asset you actually wanted, with next year starting from a cleaner base.

Retirement plans are the most reliable deduction available to a profitable Austin business, because the money stays yours. A SEP IRA and a solo 401(k) both cut taxable income, and a defined benefit plan can go further still, but they scale very differently against the same profit. Publication 560 is the source for plan types available to small employers, and Publication 590-A covers the IRA side of the question. The right answer depends on your wage, your staffing, and how much cash you can part with until retirement age.

The solo 401(k) usually wins for an owner with no employees other than a spouse. It combines an employee deferral with an employer contribution, so a modest wage can support a large total. A SEP is simpler to run but is purely employer funded and capped at 25 percent of compensation, which means it needs a much larger wage to reach the same dollars. Once staff arrive, coverage rules change the picture completely, because a SEP must generally cover eligible employees at the same contribution rate you give yourself. That is the moment plan design stops being a personal decision. Age matters as well. An owner in their fifties with strong profit and no staff can often move far more money through a defined benefit plan than any 401(k) permits, though the tradeoff is a required contribution every single year instead of an optional one.

Numbers make the gap plain. An Austin S corporation owner takes a 100,000 dollar wage. A SEP allows roughly 25,000 dollars. A solo 401(k) allows the employee deferral plus 25 percent of the wage, so the combined figure can run well past 40,000 dollars on that same salary. That difference is not academic, it is the cost of a used work truck every year. Start smaller and the logic still holds. An owner deferring 12,000 dollars at a 24 percent marginal rate keeps about 2,880 dollars in federal tax, and in Texas no state layer claws part of that back, which is a plain advantage over an owner doing the identical thing in California or New York.

Because Texas has no personal income tax, the deduction is worth exactly its federal value and nothing more is lost or gained at the state line. That simplifies the decision, and it also means the retirement plan and the salary figure are one decision rather than two. Set the wage too low and the plan has nothing to work with, since contributions are measured against compensation. A tax strategy for business owners in Austin that ignores plan design leaves the largest legal deduction sitting on the table year after year. Our tax strategy consulting team sizes the plan against the wage every fall, before the window closes.

The mistake is the deadline. A solo 401(k) generally has to be established by the business tax year end for employee deferrals, while a SEP can be funded as late as the extended due date of the return filed with Form 7004. Owners discover this difference in March and lose the year entirely. The other miss is forgetting that a plan covering employees carries real obligations under the employment taxes rules and cannot be run as an owner only arrangement once the first hire starts. Decide the plan in the third quarter and the contribution becomes a budget line rather than a scramble, and the deduction shows up on your individual tax return exactly as planned.

With no Texas withholding to lean on, an Austin owner funds the entire federal liability out of pocket, four times a year. Texas takes no cut of that income, but the federal government takes all of it, and it expects the money as you earn it rather than in one payment the following spring. Payments run on Form 1040-ES and are due April 15, June 15, September 15, and the following January 15. The IRS page on estimated taxes explains the safe harbors, and Publication 505 goes deeper on the mechanics. Pay 100 percent of last year’s tax, or 110 percent if your prior year adjusted gross income topped 150,000 dollars, and the underpayment penalty computed on Form 2210 generally does not apply no matter how good this year turns out.

The qualified business income deduction is the other half of the picture. Form 8995 handles the simple case and Form 8995-A handles the phase out range, where the deduction gets limited by W-2 wages paid and by the kind of business you run. Service businesses lose it entirely above the top of the range. Other businesses can keep it if they pay enough wages or hold enough qualifying property. The threshold that matters is taxable income, not business profit, so a spouse’s wages or a large capital gain can push you into the phase out even in a flat year for the company. This is exactly why the S corporation salary decision and the QBI calculation cannot be made in different months by different people who never speak.

Here is the interaction. An Austin consulting S corporation shows 90,000 dollars of pass through profit after a 90,000 dollar owner wage. A 20 percent QBI deduction on that profit is 18,000 dollars, worth roughly 4,320 dollars at a 24 percent rate, assuming taxable income stays below the phase out. Now suppose the same owner owes 12,000 dollars of estimated tax for the quarter and skips it because a client paid late. The penalty itself is modest, but it is computed quarter by quarter and the habit compounds. Paying the safe harbor amount on time costs nothing extra and removes the question from the return.

Quarterly payments do double duty as a checkpoint. Four times a year someone should look at profit to date, compare it against the plan, and adjust. That is the moment a fall equipment purchase gets scheduled or a wage gets revised. Owners who wait until the return is being prepared to discover that profit doubled have already lost the chance to do anything about it, because most of the useful moves carry deadlines that fall inside the tax year. The payment itself takes a few minutes through IRS Direct Pay. The number behind the payment is the part that takes work, and it comes from books that are actually closed, which is why bookkeeping and planning belong on the same desk instead of at opposite ends of the year.

The common mistake is treating the January 15 payment as optional because the return is not due yet. It is not optional, and skipping it is the most frequent reason an otherwise clean Austin return arrives carrying a penalty. The second is assuming QBI is automatic. It is a calculation with limits, and it moves whenever the salary moves. Owners who lock the safe harbor in April and revisit the figures each quarter spend the following spring filing rather than fixing, and our tax strategy consulting reviews are built around that rhythm.