What Taxes Does a New Advisory Firm Pay? A Complete Guide

2026-08-21

Learn the federal, state, and local taxes a new advisory firm must pay, with realistic 2026 figures and practical steps to stay compliant.

Starting an advisory firm brings a new set of tax obligations. You’ll pay federal income tax, self-employment tax (if not incorporated), state income tax, and possibly payroll tax if you have employees. This guide breaks down each tax, with realistic 2026 figures, and gives you concrete steps to manage them.

Federal Income Tax

Your firm’s structure determines how you pay federal income tax. Most new advisory firms choose either an S corporation or a limited liability company (LLC) taxed as a sole proprietorship or partnership.

S corporation: The firm files Form 1120-S, but profits pass through to your personal return. You pay tax at your individual rate, which ranges from 10% to 37% for 2026. You must pay yourself a reasonable salary, subject to payroll taxes.
LLC (single-member): You report business income on Schedule C of your personal return. You pay self-employment tax on the entire net profit, plus income tax at your individual rate.
LLC (multi-member): The firm files Form 1065, and each member receives a Schedule K-1. You pay tax on your share of profits, plus self-employment tax on that amount.

Estimated tax payments: The IRS expects you to pay taxes quarterly if you expect to owe more than $1,000. For 2026, the due dates are April 15, June 15, September 15, and January 15, 2027. Use Form 1040-ES to calculate and pay. Underpayment penalties apply if you miss these.

Self-Employment Tax

If you are a sole proprietor, partner, or LLC member, you pay self-employment tax, which covers Social Security and Medicare. For 2026, the rate is 15.3% on net earnings up to $176,100 (Social Security wage base), and 2.9% on earnings above that. You can deduct the employer-equivalent portion (7.65%) on your personal return.

Example: If your firm nets $100,000 in 2026, you owe $15,300 in self-employment tax, plus income tax on the remaining $84,700 (after the deduction).

State Income Tax

Most states impose an income tax on business profits. Rates vary widely:

No income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming.
Flat rate: Colorado (4.4%), Illinois (4.95%), Indiana (3.05%), Massachusetts (5%), Michigan (4.25%), North Carolina (4.75%), Pennsylvania (3.07%), Utah (4.65%).
Progressive rates: California (1% to 13.3%), New York (4% to 10.9%), New Jersey (1.4% to 10.75%).

Check your state’s department of revenue for specific filing requirements. Some states also have a gross receipts tax, like Texas (franchise tax) or Washington (business and occupation tax).

Payroll Taxes

If you hire employees, you must withhold and pay:

Federal income tax withholding (based on Form W-4).
Social Security and Medicare (FICA): 7.65% from employee wages, and you pay a matching 7.65%.
Federal unemployment tax (FUTA): 6% on the first $7,000 of each employee’s wages, but you get a credit for state unemployment taxes, often reducing it to 0.6%.
State unemployment tax (SUTA): Rates vary by state and your experience rating, typically 1% to 6%.

You’ll need to register for an Employer Identification Number (EIN) and file quarterly payroll tax returns (Form 941). Many firms use a payroll service like Gusto or ADP, which costs $40-$80 per month plus per-employee fees.

Local Taxes

Some cities and counties impose additional taxes:

Business license tax: Many cities require an annual license fee, often $50-$500 depending on revenue.
Gross receipts tax: For example, Los Angeles charges 0.45% to 1.5% of gross receipts, while San Francisco charges 0.1% to 0.6%.
Personal property tax: If you own equipment, some jurisdictions tax it annually.

Check with your city and county for specific requirements.

Sales Tax

Advisory services are generally not subject to sales tax, as they are considered professional services. However, if you sell tangible goods like books or software, you may need to collect sales tax. Most advisory firms do not charge sales tax, but verify with your state.

Tax Deductions for Advisory Firms

Reduce your taxable income with these common deductions:

Business expenses: Office rent, software subscriptions (e.g., CRM, portfolio management), marketing, professional liability insurance, continuing education, and licensing fees.
Home office: If you have a dedicated space, you can deduct $5 per square foot (up to 300 square feet) or actual expenses.
Retirement contributions: SEP IRA (up to 25% of compensation, max $70,000 for 2026) or solo 401(k) (up to $23,500 employee deferral, plus profit sharing).
Health insurance premiums: If you are self-employed, you can deduct premiums for yourself and dependents.
Vehicle expenses: Use the standard mileage rate of 67 cents per mile for business driving, or actual expenses.

Practical Steps to Take This Week

Determine your business structure. If you haven’t already, consult a CPA to choose between an LLC, S corp, or other structure. This decision affects all your taxes.
Get an EIN. Apply online at IRS.gov. It’s free and takes minutes.
Set up a separate business bank account. This simplifies tracking income and expenses.
Open a dedicated bookkeeping system. Use software like QuickBooks or Xero, or hire a bookkeeper. Track every expense.
Calculate your estimated tax payments. Use Form 1040-ES or work with a tax professional to avoid underpayment penalties.
Register for state and local taxes. Visit your state’s revenue department website and your city’s business license office.
If hiring, set up payroll. Choose a payroll service and register for state unemployment insurance.

FAQ

Q: Do I need to pay estimated taxes in my first year? A: Yes, if you expect to owe more than $1,000 in federal taxes. Pay quarterly to avoid penalties. You can base payments on 100% of last year’s tax (if any) or 90% of current year’s liability.

Q: Should I choose an S corporation to save on self-employment tax? A: Possibly. An S corp allows you to take a reasonable salary (subject to payroll taxes) and distributions (not subject to self-employment tax). But you’ll have additional payroll costs and compliance. For many new firms, an LLC is simpler. Consult a CPA.

Q: What if I miss a tax deadline? A: You’ll face penalties and interest. File as soon as possible and consider an extension if needed. The IRS offers penalty relief for first-time filers in some cases.

Q: Are advisory fees subject to sales tax? A: Generally no, as professional services are exempt in most states. But check your state’s rules, especially if you sell any tangible products.

The Bottom Line

New advisory firms face a complex tax landscape, but you can manage it with planning. Know your federal, state, and local obligations, set aside money for taxes, and use deductions to lower your bill. Work with a CPA who understands advisory firms. Take the steps above this week to stay compliant and avoid surprises. The cost of professional help is a deductible business expense, and it often pays for itself in savings and peace of mind.