How LA Business Owners Making $200K+ Are Overpaying California Taxes

By The Tax Shack | August 2026 | Los Angeles, CA

If you're paying $30,000 to $100,000 in taxes every year, that's not “just how it is” or how it should be. That usually means one thing: no real tax planning.

If your business is generating $200,000 or more in net income and you're filing the same way you did three years ago, there's a good chance you're overpaying. Not because of bad luck, but because California's tax code has more levers than most business owners know exist, and most of those levers never get pulled at a basic tax prep appointment.

There's a difference between someone who tells you what you owe and someone who helps you build a strategy to bring that number down. Here's what's actually leaving money on the table for higher-earning LA business owners in 2026.

1. Still Operating as a Sole Proprietor or Single-Member LLC

This is the most common and most expensive oversight for business owners whose income has grown.

As a sole proprietor, 100% of your net income is subject to self-employment tax. That’s 15.3% on the first $176,100, then 2.9% above that. On $200,000 in net income, that's roughly $28,500 in self-employment taxes before you even get to income tax.

Electing S-Corp taxation changes the math. Instead of all $200,000 being subject to SE tax, you pay yourself a reasonable salary, say $100,000, and take the remaining $100,000 as a distribution. SE tax now only applies to the salary portion. The savings: approximately $13,200 per year on that same $200,000 income. (IRS Publication 334)

The S-Corp election isn't right for everyone, as there are payroll costs and added administrative requirements, but for most business owners consistently clearing $80,000+ in net profit, the math usually works. If you've never had this conversation with your preparer, that's the first question to ask.

2. Not Electing the California PTET

We've covered the Pass-Through Entity Tax in detail in a separate post, but it's worth citing here because it's the single most impactful strategy many LA business owners are still skipping.

Here's the short version: California allows S-Corps and partnerships to pay a 9.3% elective tax at the entity level. That payment is a fully deductible business expense on your federal return with no SALT cap restriction. For a business owner with $300,000 in pass-through income, that's a $27,900 federal deduction that would otherwise be limited or unavailable.

The June 15 deadline is the critical date each year, as missing it costs you the deduction for that tax year. (California Franchise Tax Board, Form 3804)

3. Missing the SALT Cap Expansion

The One Big Beautiful Bill Act (OBBBA) raised the federal SALT deduction cap from $10,000 to $40,000 for most filers (phasing out above $500,000 MAGI) through 2029. This is a major change for California business owners who were previously leaving most of their state tax payments federally undeductible.

One important nuance to name is that the cap requires itemizing on Schedule A. It doesn't apply automatically. And for business owners above the $500,000 MAGI phase-out threshold, the PTET election (above) becomes even more important since it bypasses the SALT cap entirely at the entity level.

4. Not Maximizing Retirement Contributions

A SEP-IRA allows contributions of up to 25% of net self-employment income, up to the annual IRS limit. A Solo 401(k) can go even further, up to $70,000 in combined employee and employer contributions for 2025, with limits adjusting annually.

For a business owner making $250,000, maxing a SEP-IRA contribution could mean a $62,500 deduction coming directly off taxable income. At California's 9.3% bracket plus a 32% federal rate, that's over $25,000 in combined tax savings and that money instead goes into a tax-deferred retirement account growing in your name.

Most business owners contribute something to retirement. Far less are contributing the maximum they're legally allowed. The difference is often tens of thousands of dollars per year in unnecessary taxes.

5. Ignoring Income Timing

Using strategy in timing of income recognition becomes important at higher income levels. Business owners can benefit from deferring income into the following year or accelerating deductions into the current year by reducing current-year taxable income and shifting earnings to a potentially lower tax environment.

In practical terms this could mean invoicing a client in January rather than December, accelerating an equipment purchase you planned for next year into this year to capture the Section 179 deduction, or timing a bonus payment to employees before year-end.

None of this is complicated, but it requires someone who's looking at your numbers before December 31, not in March.

6. Running Two Depreciation Schedules Without Knowing It

This one is specific to California and catches business owners off guard every year.

California does not conform to the federal 100% bonus depreciation restored under the OBBBA. It also doesn't allow the federal QBI deduction. The result is that business owners now carry two separate depreciation schedules — one for federal, one for California — which can create differences between what you deduct federally versus what you deduct on your state return.

If your preparer isn't tracking both schedules, you could be filing your California return incorrectly by either overpaying or creating a compliance risk. (California Franchise Tax Board)

What About High-Income W-2 Earners?

Paying $30,000 to $100,000 in taxes isn't just a business owner problem. If you're a doctor, attorney, police officer, teacher, or other high-income professional earning a W-2, you're likely overpaying too, and you have your own set of strategies available.

W-2 earners can't restructure as an S-Corp or elect the PTET. But there are still levers available:

Maximize retirement contributions. A 403(b), 457(b), or 401(k) through your employer, combined with a backdoor Roth IRA or after-tax contributions, can shelter a large portion of your income from federal taxes.

Health Savings Account (HSA). If you have a high-deductible health plan, an HSA contribution is triple tax-advantaged with the deductible going in, tax-free growth, tax-free for qualified medical expenses. For 2026 the family contribution limit is $8,550. (IRS Revenue Procedure 2025-19)

Itemizing vs. standard deduction. High-income W-2 earners with significant mortgage interest, charitable giving, or state taxes can benefit from itemizing, but most never run the comparison. With the SALT cap now at $40,000 for most filers under the OBBBA, the math has shifted in 2026.

Deferred compensation plans. Some employers, particularly in healthcare and law, can offer non-qualified deferred compensation plans that let you defer income to future years when your tax rate may be lower.

Real estate. Owning rental property as a W-2 earner opens access to depreciation deductions. If you qualify as a real estate professional (750+ hours/year), those losses can offset your W-2 income directly. This is a strategy some high-earning professionals use deliberately. We covered how this works in detail in our rental property depreciation post.

The fact is most W-2 earners overpay not because the strategies don't exist, but because no one is looking at their full picture year-round. A filing-only relationship with a tax preparer won't surface any of this. Having a year-round advisor to speak with is where you can make the most of these strategic advantages.

What This Actually Means

None of these strategies are exotic or aggressive. They're the standard toolkit for a tax professional working proactively with a higher-earning client. The problem isn't that they're hard to access… it's that they require someone who's engaged with your business throughout the year, not just at filing time.

At The Tax Shack, our CTEC-certified preparers work with LA business owners and high-income professionals year-round on exactly this kind of planning. If your income has grown and your tax strategy hasn't kept pace, that's the conversation worth having before year-end.

Stop by our Los Angeles location or give us a call.

Quick-Answer FAQ

At what income level should I consider an S-Corp election in California? Generally when your net profit consistently exceeds $80,000–$100,000 per year. Below that, the administrative costs of running payroll often offset the SE tax savings. Above that, the math usually works in your favor. (IRS Publication 334)

What is the California PTET and who should elect it? The Pass-Through Entity Tax is a 9.3% elective tax paid at the business level that creates a fully deductible federal expense, which bypasses the personal SALT cap. Most profitable S-Corp and partnership owners in California should be evaluating this annually. (California FTB, Form 3804)

What is the SALT deduction cap for 2026? $40,000 for most filers under the OBBBA, phasing out above $500,000 MAGI. Requires itemizing on Schedule A to claim. (IRS.gov)

Does California follow federal bonus depreciation rules? No. California does not conform to the OBBBA's 100% bonus depreciation or the QBI deduction. Federal and California depreciation schedules differ, requiring separate tracking. (California Franchise Tax Board)

What's the maximum SEP-IRA contribution for 2026? 25% of net self-employment income up to the annual IRS limit (approximately $70,000 for 2025, adjusting annually). One of the most effective and underutilized deductions available to self-employed business owners. (IRS Publication 334)

What can high-income W-2 earners do to reduce their tax bill? Key strategies include maxing employer retirement plans (401k, 403b, 457b), contributing to an HSA, itemizing deductions under the expanded SALT cap, using deferred compensation plans where available, and investing in real estate to access depreciation deductions. None of these require owning a business. They simply require a preparer who's looking at your full picture.

Sources: IRS Publication 334, Tax Guide for Small Business (2025); California Franchise Tax Board; One Big Beautiful Bill Act (P.L. 119-21); IRS Revenue Procedure 2025-19, HSA Limits.

This post is for general informational purposes and is not a substitute for personalized tax advice.