7 Things to Know Before You Start a New Advisory Firm

Starting a new advisory firm is exciting, but the tax side can trip you up if you ignore it. The IRS treats your firm as a business from day one, and the choices you make now affect your taxes for years. Here are seven things to know before you launch, with concrete numbers and steps you can take this week.

1. Your Entity Choice Sets Your Tax Baseline

Your legal structure determines how you pay taxes. For most new advisory firms, the two main options are an S corporation and an LLC taxed as a sole proprietorship or partnership.

• S corp: You pay yourself a reasonable salary (subject to FICA taxes), and the rest of your profits pass through without self-employment tax. The trade-off: extra payroll administration and the requirement to file Form 1120-S.
• LLC (single-member): You report profits on Schedule C and pay self-employment tax (15.3% in 2026) on all net earnings. No payroll needed, but you lose the potential FICA savings.

A common rule of thumb: if your net profit exceeds $40,000 to $60,000, an S corp can save you $2,000 to $5,000 annually in self-employment taxes, but only if you run payroll correctly. If you are starting small, an LLC is simpler and cheaper to maintain.

Action this week: Meet with a CPA or tax attorney to compare your projected income against the costs of each structure. Ask for a break-even analysis.

2. You Must Pay Quarterly Estimated Taxes

As a self-employed owner, the IRS expects you to pay taxes quarterly, not once a year. In 2026, the federal self-employment tax rate is 15.3% (12.4% Social Security, 2.9% Medicare), and your income tax bracket depends on your total income.

If you fail to pay enough quarterly, you face underpayment penalties. The safe harbor rule: pay at least 100% of last year’s tax liability (110% if your adjusted gross income was over $150,000).

Action this week: Calculate your projected 2026 income and set aside 25% to 35% of every client payment into a separate savings account. Use IRS Form 1040-ES to estimate your quarterly payments.

3. Start-Up Costs Are Deductible, but Only Up to a Limit

You can deduct up to $5,000 in start-up costs in your first year, but the deduction phases out dollar-for-dollar once your total start-up costs exceed $50,000. Costs above the limit must be amortized over 180 months.

Eligible costs include market research, advertising, training, and legal fees. Your costs for registering the business, such as state filing fees, are also deductible.

Action this week: Create a spreadsheet of every pre-launch expense, from your website domain to business cards. Keep receipts for all of them.

4. Home Office Deduction: Real but Risky

If you work from home, you can deduct a portion of your rent or mortgage interest, utilities, and internet. The simplified method gives you $5 per square foot, up to 300 square feet, for a maximum of $1,500. The regular method uses actual expenses, which can yield a larger deduction but requires detailed records.

The IRS requires that your home office be used exclusively and regularly for business. If you use the space for personal tasks, you risk an audit.

Action this week: Measure your dedicated office space and calculate the percentage of your home’s total square footage. Test both methods to see which gives you a larger deduction.

5. Retirement Plans Offer Big Tax Breaks

As a new firm, you have no employees, so you can choose a plan that maximizes your own savings. A solo 401(k) allows you to contribute up to $23,000 in employee deferrals (plus $7,500 catch-up if you are 50 or older) and up to 25% of your net earnings as an employer contribution. In 2026, the total limit is $69,000 (or $76,500 with catch-up).

A SEP IRA allows contributions up to 25% of net earnings, with a maximum of $69,000 in 2026, but it is simpler to set up.

Action this week: Open a solo 401(k) with a brokerage like Fidelity or Vanguard. Set up automatic transfers to hit your contribution goal.

6. You Can Deduct Health Insurance Premiums

If you are self-employed and not eligible for an employer-sponsored plan, you can deduct health insurance premiums for yourself, your spouse, and your dependents. This deduction reduces your adjusted gross income, which also lowers your income tax and self-employment tax.

You must have a net profit for the year to claim the deduction. If you have a loss, you cannot take it.

Action this week: If you have not already, purchase a health plan through the ACA marketplace or a private insurer. Keep your premium statements in a dedicated folder.

7. State Taxes and Registration Are Not Optional

You must register your firm with your state, and you may need to collect sales tax if you sell products or certain services. Most advisory services are not subject to sales tax, but some states tax consulting or training. You also need to pay state income tax, and if you have employees, you must register for unemployment insurance.

State tax rates vary widely. For example, California has a top income tax rate of 13.3%, while Texas has no state income tax. Check your state’s requirements on the Secretary of State website.

Action this week: Register your business with your state and apply for an EIN through the IRS website. Check your state’s tax authority for any sales tax obligations.

FAQ

Q: When should I file my first quarterly tax payment? A: If you start your firm in 2026, your first payment is due April 15, 2026, for income earned from January through March. If you start later, the due dates are June 15, September 15, and January 15, 2027.

Q: Can I deduct my laptop and office furniture? A: Yes, under Section 179, you can deduct the full cost of equipment in the year you place it in service, up to $1,160,000 in 2026. Alternatively, you can use bonus depreciation or regular depreciation.

Q: What if I have a loss in my first year? A: You can carry the loss forward to offset future profits. You cannot deduct a loss against your spouse’s income if you are married filing separately, but you can if you file jointly.

Q: Do I need to hire a CPA? A: For a new firm, a CPA can save you money by identifying deductions and avoiding penalties. Expect to pay $500 to $1,500 for tax preparation and advice, which is often worth it.

Related guides

• 7 Questions to Ask Before Buying a New Advisory Firm
• Best New Advisory Firm Tools Compared in 2026
• How Much Should a New Advisory Firm Set Aside for Taxes?

The bottom line

Starting an advisory firm comes with real tax responsibilities. Choose your entity wisely, pay quarterly taxes, and track every deductible expense. The seven items above are not exhaustive, but they cover the basics that trip up most new owners. Take one action this week: set up a separate bank account for tax savings and schedule a meeting with a tax professional. Your future self will thank you.