In This Article
- Essential year-end tax moves MSPs should make to reduce taxable income
- How to optimize entity structure, owner compensation, and deductions
- What MSP owners commonly miss that increases tax exposure
- Practical financial steps to prepare for a stronger next fiscal year
For many MSP owners, year-end arrives with a mix of relief and dread. You’ve spent the year juggling client demands, tool renewals, cybersecurity risks, talent shortages, and growth initiatives. But taxes? They tend to get attention only once the calendar flips.
However, year-end tax planning is one of the highest-ROI activities an MSP can do. Many firms overpay taxes simply because they don’t align financial and operational decisions with smart tax strategy.
MSP Tax Tips to Close Out the Year
Below are the top 10 year-end tax tips that every MSP should consider before closing the books on 2025.
1. Reassess Your Entity Structure for Tax Efficiency
Most MSPs start as an LLC and stay there far longer than they should. By the time revenue hits $300,000–$500,000, the wrong structure can lead to unnecessary self-employment taxes.
Year-end is the ideal time to review:
- Whether electing S-Corp status reduces overall tax burden
- If your current structure supports planned hiring or acquisitions
- Whether multiowner MSPs should adjust their operating or shareholder agreements
Bonus Tip: The best structure minimizes tax and provides flexibility for scaling and ownership transitions.
2. Adjust Owner Salary Before Dec. 31
For S-Corp MSPs, owner compensation is a balancing act. Too low could trigger IRS scrutiny. Too high can cause excessive payroll taxes.
Consider:
- Reviewing industry benchmarks
- Aligning salary with actual role (CEO, engineer, CIO, etc.)
- Adjusting wages before year’s end to maintain compliance
Most MSPs adjust the owner’s pay once in Q4 to solidify tax positioning.
3. Accelerate Deductible Expenses Strategically
This is not about spending money to save money; it’s about timing. If your MSP had a strong year, bringing some expenses into December can meaningfully lower taxable income.
Alternatively, consider pushing back big purchases to Jan. 1 the following year. That’s if you’ve already incurred a lot of expenses during the year.
Strategic expenses to consider:
- Annual tool renewals
- Prepaid insurance
- Hardware purchases
- Marketing initiatives
- Professional fees or consulting projects
This works particularly well for cash-basis taxpayers, which is common for most small MSPs.
For accrual-based MSPs, shifting expenses across tax years depends on when the liability is incurred, not when cash is paid. This allows you to intentionally time contracts, renewals, and vendor commitments to manage taxable income. By accelerating necessary expenses into December or deferring nonurgent ones into January, you can strategically influence your tax position while maintaining cash flow flexibility.
4. Leverage Section 179 and Bonus Depreciation
MSPs often buy equipment, servers, networking gear, and vehicles. But they don’t always maximize depreciation strategies.
Before the year ends:
- Review fixed asset purchases
- Identify what qualifies for Section 179
- Determine if bonus depreciation will benefit your situation
- Plan 2025 and 2026 equipment needs proactively
Be Careful: Not all purchases should be immediately expensed. Some are better depreciated depending on long-term tax planning goals.
5. Review Contractor vs. Employee Classification
MSPs commonly use contractors for project work or overflow labor, and misclassification is a common issue. Misclassification can trigger:
- Payroll tax penalties
- Back wages
- IRS audits
Before the year ends, conduct a quick review:
- Does the contractor follow your SOPs or schedule?
- Do they work primarily for your MSP?
- Are they client-facing?
If the answers are “yes,” reclassification or restructuring may help reduce long-term tax risk. This can be a complex area. Discuss it with your CPA before making changes.
6. Maximize Retirement Contributions: A Win for Tax and Cash Flow
Retirement contributions are one of the most effective last-minute tax strategies.
Options for MSP owners:
- SEP IRA: Best for owner-heavy MSPs or those with mostly contractors rather than employees.
- Solo 401(k): Ideal for MSP owners who are primarily self-employed or have a small team.
- Traditional 401(k) with Employer Match: Most popular option for MSPs with employees
These allow substantial deductions, reduce taxable income, and support long-term planning when cash flow is strong.
For growing MSPs, a 401(k) can also support recruiting and retention efforts.
Michelle Strickland
7. Evaluate R&D Tax Credit Opportunities
Most MSPs assume they don’t qualify for the federal Research & Development (R&D) Tax Credit.
But many MSP activities do qualify, including:
- Developing automation workflows
- Creating proprietary scripts
- Building custom integrations
- Enhancing ticketing or monitoring processes
A year-end R&D review can potentially unlock meaningful tax credits, often $10,000–$50,000 for midsized MSPs.
8. Clean Up Your Books Before the Calendar Turns
Poor bookkeeping is one of the biggest sources of owner headaches, overpaid taxes, and IRS notices.
Before year-end:
- Reconcile all accounts (including vendor credits)
- Classify project vs. recurring revenue correctly
- Ensure owner distributions and payroll are clean
- Review Ask-My-Accountant and uncategorized transactions
- Confirm tool costs and COGS are properly recorded
Clean books mean more accurate tax planning and less stress. Your CPA will thank you.
9. Plan for Multistate Tax Exposure — Especially Remote Teams
MSPs often hire remote techs or serve clients across state lines. But they forget about state tax implications.
Before December:
- Verify nexus in all states where employees or contractors work.
- Review out-of-state client revenue thresholds.
- Confirm compliance with state payroll, sales tax, and franchise tax requirements.
Proactively addressing multistate issues avoids penalties and protects margins.
10. Forecast Your 2025 Tax Liability to Avoid Surprises
The most successful MSPs don’t wait for a tax bill; they plan for it.
As part of your year-end process:
- Project 2025 taxable income.
- Estimate Q4 and year-end tax payments. Remember: Q4 estimated tax payments for the 2025 tax year are due by:
- Dec. 15, 2025, for C corporations
- Jan. 15, 2026, for S corporation business owners.
- Build tax savings into your 2026 cash budget.
- Identify opportunities to smooth tax burden across the year to optimize cash flow.
This turns taxes into a predictable business rhythm instead of an annual shock.
FAQs: Year-end Tax Questions for MSP Owners
Q: Should an MSP wait until tax season to review its business structure?
A: No. Reviewing and adjusting your entity before year’s end can help you save on taxes and set your business up for next year.
Q: Are hardware and tool purchases automatically deductible?
A: Not always. It depends on depreciation rules, timing, and long-term planning.
Q: Do MSPs really qualify for R&D credits?
A: Often yes, especially those doing automation, scripting, or custom processes.
Q: How often should an MSP review owner compensation?
A: Annually, typically in Q4 based on the year’s profitability and IRS guidelines.
Q: What if I hire a contractor late in the year? Does that affect my taxes?
A: Yes. Payments to contractors are deductible. But make sure they are properly classified and reported to avoid penalties.
Q: When should an MSP contact a tax professional?
A: Before the year ends. The biggest savings opportunities disappear after Dec. 31.
Michelle Stricklin is fractional CFO and tax CPA for Meliora Consulting PLLC. She specializes in MSPs, helping them improve profitability, strengthen cash flow, and reduce tax exposure so they can scale with confidence.
Featured image: AI generated by Copilot
