Small business tax planning for contractors
Tax planning for a trades business comes down to three habits: move a share of every deposit into a separate tax account, pay estimated taxes on the IRS calendar, and look at the numbers with your CPA every quarter instead of once in April. For 2026, estimated payments are due April 15, June 15 and September 15, 2026, and January 15, 2027. Pay in at least 100% of last year's tax, or 110% if last year's adjusted gross income was over $150,000 on time, through withholding and estimates, and you generally avoid the underpayment penalty even if you owe more when you file (Publication 505).
The usual problem is timing: the profit shows up in the busy season and the bill shows up in April, after the cash has gone to a truck.
Set cash aside from every deposit
Pick a percentage with your CPA, then sweep it into a separate savings account each time money comes in. The IRS doesn't care how often you pay: its estimated tax page says you can pay "weekly, bi-weekly, monthly, etc." as long as enough is in by each due date.
The percentage is your projected tax for the year divided by your projected deposits. If your CPA projects $56,000 of federal tax on about $1.12 million of deposits, that's 5% of every check.
Plan for the slow months
The default IRS schedule is four equal payments, and your revenue doesn't come in equal pieces. Here's that 5% sweep for an example plumbing shop whose CPA set four payments of $12,000:
| Payment | Months it covers | Deposits | Swept at 5% | Paid | Tax account after |
|---|---|---|---|---|---|
| 1st | Jan to Mar | $180,000 | $9,000 | $12,000 | −$3,000 |
| 2nd | Apr to May | $220,000 | $11,000 | $12,000 | −$4,000 |
| 3rd | Jun to Aug | $360,000 | $18,000 | $12,000 | $2,000 |
| 4th | Sep to Dec | $360,000 | $18,000 | $12,000 | $8,000 |
The sweep covers the year, and the $8,000 left at the end goes toward the balance due when you file, since the payments were set from last year's tax. But the first two payments land after the slow months and before the busy ones. Start the year with a cushion left over from last year's account, or ask your CPA about the annualized income method in Pub 505, which can lower the payments for periods when you earned less. Either way, a cash flow forecast shows the squeeze before it happens. Sales tax you collect isn't yours either, so keep it out of this account and out of your operating cash (here's how).
Meet your CPA every quarter
Brandon Vaughn, who coaches home service owners, ran it this way in his own company. His office manager kept the books in-house, and the accountant's job got small:
…the accountant I just met with literally once a quarter. So he could just make sure that I personally was setting the right of taxes out. And then at the end of the year, he just exported out our numbers, our PNL, all of the data was already in there…
When an owner on a coaching call admitted he only talked to his CPA at tax season, Brandon pushed the same cadence:
…recommend whether or not you should be making quarterly payments, because you have to pay interest and penalties on stuff when you're not, when you just wait till the end of the year.
A quarterly meeting needs current books to work from. If yours are a few months behind, that's the first fix: bring what you have to a free profit call and we'll walk through where you stand.
How you pay yourself changes the bill
Sole proprietors and single-member LLCs pay self-employment tax of 15.3% on net earnings, on top of income tax, according to the IRS.
S corporation owners who work in the business have to take a W-2 salary first. The IRS says an S corporation must pay "reasonable compensation to a shareholder-employee in return for services" before non-wage distributions, and it can reclassify distributions as wages (IRS guidance). Brandon explained the test to an owner who had just incorporated and was setting his first salary:
So there's not a hard and fast rule, but the principle is, is it a reasonable salary that you would pay a manager to come in and do what you're doing in your business right now? And if you can't look an auditor straight in the face and convince him of that, it's probably too low.
Whether an S corporation election makes sense depends on your profit, your state and what you'd pay that manager. Run it with whoever does your tax prep and planning, and settle the year's owner pay in December with the year-end checklist.
Common tax planning questions
How much should I set aside for taxes?
There's no single safe percentage, because it depends on your profit, entity, state and household. Get a projection from your CPA, divide the tax by your expected deposits, and re-run it at every quarterly meeting. If a plumbing shop's summer runs well ahead of plan, raise the percentage at the next quarterly meeting instead of waiting for April.
I'm an S corporation owner on payroll. Do I still pay estimates?
Often, yes. The IRS says individuals, including S corporation shareholders, generally have to make estimated payments if they expect to owe $1,000 or more for the year after withholding and credits. Your distributions have no tax withheld, so check whether your paycheck withholding covers them. Withholding counts toward the total, so raising it is another way to close the gap.
What if I can't make a payment on time?
Pay what you can by the due date and catch up as soon as you can. The IRS figures the penalty from the amount you underpaid, how long it stayed unpaid and its quarterly interest rate, so a short payment costs less the sooner you fix it.
