How to Know If You’re Paying Too Much in Taxes

Go find your 2025 tax return, the complete PDF with every schedule and form your preparer attached. Keep it open beside you for the next fifteen minutes, because this article works best as a treasure hunt.

Here is why it’s worth the effort. When you pay the IRS too little, you hear about it quickly. There is a notice for that, along with interest that compounds daily at 7 percent until the balance is cleared. When you pay too much because a deduction was never claimed or an election was never made, the silence is complete. No notice arrives and nobody calls, so the money stays gone year after year, and most owners never learn it was theirs to keep.

The encouraging part is that overpayment leaves fingerprints. Usually it shows up as a blank line, or a form that should be attached to the return and isn’t. Every sign below comes with the exact form and line to check, so you can see for yourself in a few minutes whether it applies to you.

Everything on this list is also fixable. Some of it can still lower your 2026 bill before December 31, and some can be recovered from prior years through an amended return, which you can generally file within three years of the original. Many owners find at least one item worth real money on the first pass. Let’s go find yours.

Most owners of pass-through businesses will want two returns in front of them. The first is your personal Form 1040 with its schedules. The second is your business return, which is Form 1120-S for an S corporation or Form 1065 for a partnership or multi-member limited liability company (LLC). Sole proprietors and single-member LLCs report the business on Schedule C inside the 1040, so one return covers both. Line numbers below refer to 2025 forms, the return most owners filed this year.

Use this table as your map, then read the section for any sign that looks familiar.

The qualified business income (QBI) deduction under Section 199A lets owners of sole proprietorships, partnerships, S corporations, and most LLCs deduct up to 20 percent of their business profit on their personal return. The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, made it permanent. For 2026, the full deduction applies when taxable income is at or below $201,750 for single filers or $403,500 for joint filers. Above those levels, limits based on W-2 wages and business property phase in over the next $75,000 (single) or $150,000 (joint). For a specified service trade or business (SSTB), such as medicine, law, accounting, or consulting, the deduction itself phases out across that range.

The most common gap we see involves real estate. An HVAC contractor owns her shop building through a separate LLC that rents it to her operating company. Because she controls both, that rental generally counts as a trade or business for QBI purposes, and its net income qualifies for the 20 percent deduction. Her preparer filed the building LLC as a passive investment, so it never appeared on Form 8995. At $60,000 of net rent a year, she was missing a $12,000 deduction worth roughly $3,800 annually in the 32 percent bracket, and the open years can be amended.

Professional practices feel the phase-out most sharply. A dentist filing jointly with $520,000 of projected 2026 taxable income and $400,000 of QBI sits about three-quarters of the way through the range, so roughly 78 percent of her deduction disappears. She claims around $17,900 instead of $80,000. Sign 9 shows how a single retirement plan decision brings most of it back.

How to fix it: Ask your preparer to walk you through Form 8995 or 8995-A line by line and confirm every business you own is listed. Before year-end, ask for a model showing how salary and retirement contributions move the deduction.

If you operate as a sole proprietor or a single-member LLC taxed like one, every dollar of profit is subject to self-employment tax: 15.3 percent up to the Social Security wage base, and 2.9 percent Medicare above it. Early on, that structure makes sense. Once profits climb, it often becomes the single most expensive habit on the return.

Jordan, a landscape designer in Charlotte, netted $180,000 on Schedule C last year and paid about $25,400 in self-employment tax. As an S corporation paying himself a reasonable $90,000 salary, payroll taxes would apply only to that salary, about $13,800, and the remaining profit would flow to him as distributions without payroll tax. Even after a few thousand dollars a year in added payroll and filing costs, the savings are meaningful, and they grow with every good year.

The election isn’t right for everyone. Salary has to be defensible for the work you do. State rules matter too, since New York City doesn’t recognize S corporation status and California charges a 1.5 percent franchise tax on S corporation income, so the model should include your state.

How to fix it: An S corporation election is made on Form 2553, and the IRS grants relief for late elections in many situations. Ask for a side-by-side comparison of your current structure and an S corporation at your actual profit level.

S corporation owners who work in the business must pay themselves a reasonable salary, and the right number works in both directions. Set it too low and you invite IRS scrutiny, while also capping your QBI deduction if your income sits above the threshold. Set it too high and you pay payroll taxes on income that could have flowed through as distributions, shrinking your QBI along the way.

We often meet owners whose salary was set in the company’s first year and simply carried forward. One property management founder was still paying herself $40,000 on more than $400,000 of profit, a ratio that invites questions in an examination. Another, a consultant, was paying himself $250,000 on $300,000 of profit and handing over thousands in avoidable payroll tax. Both numbers came from a decision nobody revisited.

How to fix it: Salary can be adjusted through payroll at any point in the year. Ask for a documented reasonable compensation analysis based on your role and industry, refreshed each year as profits change.

Depreciation is where small elections quietly add up. The OBBBA made 100 percent bonus depreciation permanent for qualifying property acquired after January 19, 2025, and the 2026 Section 179 expensing limit sits at $2,560,000. Even with those generous rules, two gaps show up on returns constantly.

The first involves small purchases. The de minimis safe harbor election lets a business expense items costing $2,500 or less per item or invoice right away, without tracking them as assets. Without the election, laptops and office chairs end up on a depreciation schedule for years. The second involves real estate. A building you own is usually depreciated over 39 years (or 27.5 for residential rentals), but a cost segregation study can reclassify parts of it, such as lighting, flooring, parking lots, and specialty electrical, into shorter categories such as 5-year and 15-year property that qualifies for much faster write-offs.

A veterinary practice owner in Phoenix bought her clinic building for $1.8 million in 2023 and has been depreciating it as one 39-year asset ever since, about $46,000 a year. A cost segregation study that moves around $400,000 of that basis into shorter-lived property would produce a large catch-up deduction on her current return, and she would not need to amend a single prior year to get it.

How to fix it: The de minimis election is made annually with a timely filed return, so it can start with 2026. Cost segregation on a building you already own is implemented through an automatic accounting method change on Form 3115, which captures the missed depreciation in the current year.

Pass-through owners don’t have an employer withholding tax from each paycheck, so the IRS expects tax on business profit to arrive in quarterly estimates due April 15, June 15, September 15, and January 15. Shortfalls are charged at the federal underpayment rate, 7 percent compounded daily for the fourth quarter of 2026, and that charge isn’t deductible. A safe harbor protects you if your withholding and on-time estimates cover at least 90 percent of this year’s tax or 100 percent of last year’s, rising to 110 percent when last year’s adjusted gross income (AGI) topped $150,000.

The penalty is often the smaller part of the cost. Priya runs a healthcare staffing agency in Philadelphia, and in March 2026 she signed a regional hospital system. Her projected profit jumped from about $250,000 to more than $600,000, but her quarterly estimates stayed exactly where they were the year before. Left alone, April 2027 would bring a six-figure balance due in the same month her first estimate for the new, larger year comes due. Owners in that spot often draw on a credit line at double-digit interest to pay the IRS, an expensive way to finance a bill that was predictable back in June.

Because it’s still early November, Priya has room to act. Federal tax withheld from wages counts as if it were paid evenly through the year, so an S corporation owner who raises withholding on December payroll can cover shortfalls from earlier quarters. Seasonal or lumpy businesses can also use the annualized income installment method on Form 2210 to match payments to when income was actually earned.

How to fix it: Ask for a written projection built from your closed books and updated every quarter, with each estimate sized to what you actually owe this year.

Retirement plans are one of the few places where tax law invites an owner to move large amounts of income out of the current year on purpose. The money stays yours, invested and growing tax-deferred, while the deduction lands now. Even so, plenty of owners earning $300,000 or more are still saving through an individual retirement account (IRA) capped at $7,500.

Remember the dentist from sign 1, whose income had pushed her deep into the QBI phase-out. Suppose her practice adds a cash balance plan alongside its 401(k), and her share of the contribution is $100,000. Her taxable income falls from $520,000 to $420,000, and because that moves her back down the phase-out range, her QBI deduction rises from about $17,900 to about $53,400 at the same time. Together those changes cut her federal income tax by roughly $40,000 for the year, and the $100,000 stays hers. The plan does require contributions for eligible staff and a multi-year funding commitment, so the decision comes down to modeling those costs against the savings.

The SECURE 2.0 Act made starting a plan cheaper, too. Employers with 50 or fewer employees can claim a credit for 100 percent of eligible startup costs, up to $5,000 a year for the first three years, reported on Form 8881.

How to fix it: Many employer-funded plans, including profit sharing and defined benefit plans, can be adopted as late as your business’s filing deadline, with extensions, and still count for the prior year. Employee salary deferrals generally need a plan in place before the wages are paid, so a 401(k) for 2026 deferrals is a decision for the next few weeks.

This one tends to make owners smile, because the planning and the parenting line up nicely. When your children do real work for your business, paying them a reasonable wage moves income from your tax bracket to theirs. If the business is a sole proprietorship, or a partnership owned only by the child’s parents, wages paid to a child under 18 are also exempt from Social Security and Medicare taxes, and wages to a child under 21 are exempt from federal unemployment tax.

A bakery owner in Austin has a 16-year-old daughter who runs the shop’s Instagram account and works the counter on Saturdays. Paying her $15,000 for that work, documented with timesheets and a job description, lowers her parent’s federal income tax by about $4,800 in the 32 percent bracket and avoids roughly $2,100 in self-employment tax. Her daughter owes no federal income tax at all, because the 2026 standard deduction of $16,100 covers her entire paycheck, and she can put part of it into a Roth IRA that will grow tax-free for decades.

S corporations can pay children too, though without the payroll tax exemption, so the benefit comes from the income shift alone. In every case, the work has to be genuine and the pay has to match what you would pay anyone else for the same job.

How to fix it: Add your child to payroll with a written job description and keep simple time records. The deduction starts with the first paycheck.

If you just worked through ten signs with a PDF and a highlighter, you’ve done something most owners never do. You’ve also seen why it rarely happens: the evidence is scattered across a personal return, a business return, a W-2, a depreciation schedule, and a state filing, and nobody reads them together.

Otterz built Nyra, our proprietary AI, to do exactly that. Otterz is an AI-native accounting and financial back office for small and mid-sized businesses (SMBs), handling bookkeeping, payroll, tax preparation, compliance, and chief financial officer (CFO) services under one roof. Nyra is purpose-built for finance and builds a knowledge graph of your business, connecting each return and transaction to the entities and agreements behind it. That’s how it notices that the LLC on your Schedule E is the same company collecting rent from your S corporation.

When a client joins Otterz, Nyra reviews their full tax history and every return on file, checking each of the ten signs in this article along with many more. It then models every planning scenario available to that client, from owner salary and retirement plan design to depreciation timing and state elections, and compares the after-tax result of each one side by side. The goal is simple: every deduction and credit you’re entitled to, captured every single tax year.

Because Nyra connects directly to your monthly books, your projection updates as each month closes, so estimates match what you actually owe and year-end moves get made while there’s still time. An Otterz tax professional reviews every recommendation before it reaches you or a filing. Findings arrive in the weekly update every client receives, and larger decisions get worked through in monthly or quarterly CFO conversations.

Start with your most recent return. A blank or small qualified business income deduction on Form 1040 line 13a, five-figure self-employment tax on Schedule 2 line 4, a penalty on Form 1040 line 38, and little or nothing on the retirement contribution lines are the most common warning signs. A missing Form 6765 for a business that develops products or software is another. Each points to a specific, fixable planning gap.

On the 2025 Form 1040, the qualified business income deduction is on line 13a, supported by Form 8995 or Form 8995-A. Your Schedule K-1 reports the underlying Section 199A information in Box 17, code V for S corporations, or Box 20, code Z for partnerships. For 2026, the full 20 percent deduction applies at taxable income up to $201,750 for single filers and $403,500 for joint filers.

Pay at least 90 percent of your 2026 tax, or 100 percent of your 2025 tax, through on-time quarterly estimates and withholding. If your 2025 adjusted gross income exceeded $150,000, the prior-year figure becomes 110 percent. Raising withholding on December payroll can cover earlier shortfalls, because withholding counts as paid evenly through the year.

A 401(k) allows $24,500 in employee deferrals, plus catch-up contributions of $8,000 at age 50 and over or $11,250 at ages 60 through 63, with total defined contribution additions capped at $72,000. Defined benefit and cash balance plans can fund a retirement benefit of up to $290,000 a year, which often supports six-figure annual contributions for owners in their fifties and sixties.

Children can be paid through your business when they do genuine work at a reasonable wage. Wages paid by a parent’s sole proprietorship to a child under 18 are exempt from Social Security and Medicare taxes, and the child’s 2026 standard deduction of $16,100 means modest wages often carry no federal income tax.

Most missed items can be recovered. Amended returns can generally be filed within three years of the original filing date to claim missed deductions and credits, including the QBI deduction and the research credit. Missed depreciation on property you still own can often be captured in the current year through an accounting method change on Form 3115.

There is still meaningful time before December 31, 2026. Owners can place equipment in service, set up a 401(k) for salary deferrals, make state entity-level tax payments, and adjust year-end withholding. Some employer-funded retirement plans can even be adopted up to the 2026 return’s filing deadline in 2027.