Blog

Note: This is part of a series of articles that discuss legal strategies for design professionals. An earlier post promised a deeper look at how entity choice drives taxes, the single largest recurring expense of most design practices. 

Introduction: How Can Taxes Shape the Economics of a Design Firm as Much as Any Client Roster?

Because taxes are the single largest expense for architects and engineers, careful consideration and design of the tax elections and classifications are vital to the economic success of these professionals. Two firms with identical revenue can keep very different amounts after tax depending on how they are organized, how their owners are paid, and which elections they make. For architects and engineers practicing in New York, the analysis runs on three tracks at once: federal income and employment tax, New York State tax, and, for firms operating in the five boroughs, New York City tax. An additional layer of consideration is the New York pass-through entity tax election, which can recapture a federal deduction that the State and Local Tax (“SALT”) limitation otherwise took away. This overview walks through the tax posture of each entity form available to design professionals and the New York and City rules that most affect the choice.

As discussed in previous posts, licensing narrows the options before tax ever enters the picture. A New York design practice generally operates as a professional corporation, a design professional service corporation, a professional limited liability company, or a registered limited liability partnership, and some of these can also elect subchapter S corporation status (an “S corporation”) for tax purposes. The good news for tax planning is that most of these forms are pass-through vehicles, and the entity that is best for licensing and liability is often workable for tax as well. The task is to understand the tradeoffs and to make the elections that fit the firm’s economics.

Key Takeaways

• Tax classification, not the entity label, drives the result. Many times, the same professional entity can be taxed as a partnership, an S corporation, or a C corporation, and self-employment tax, the qualified business income deduction, and the New York overlays all follow from that choice.
• Architects and engineers get the full 20% QBI deduction — no income cap. Section 199A carves architecture and engineering out of the “specified service” penalty that phases out the deduction for lawyers, doctors, and accountants, so design-firm owners claim the full 20% subject only to the wage-and-property limitation above the income threshold.
• Coordinate S corporation salary with the QBI deduction — they pull against each other. Wages and reasonable compensation reduce qualified business income and are themselves ineligible for the deduction, so the two should be modeled together, not optimized in isolation.
• New York does not automatically follow your federal S election. A separate New York S election is required and is effective only with unanimous shareholder consent — and a firm whose investment income exceeds 50% of federal gross income can have the election forced on it.
• New York City gives no pass-through escape and does not recognize S corporations. An unincorporated firm pays the 4% Unincorporated Business Tax; a corporation (including a federal/State S corporation) pays the City’s entity-level Business Corporation Tax. Some form of City-level tax applies either way.
• The pass-through entity tax (PTET) is usually the single largest saving available. Electing it lets the firm deduct New York income tax at the entity level — sidestepping the federal SALT cap — while owners take a matching, refundable credit; a parallel New York City PTET is available on top. The election is annual and irrevocable after the first estimated-payment deadline, so it must be calendared early.
• Revisit the structure every year. The right entity balances federal, State, and City tax across multiple years and should be re-examined whenever ownership, revenue, or the mix of in-state and out-of-state work changes.

The Federal Baseline: How Does Federal Classification Drives Everything?

Tax classification, not the label on the certificate, determines how a firm and its owners are taxed. The same Professional Limited Liability Company (“PLLC”) can be taxed as a partnership, as an S corporation, or as a C corporation depending on the elections made. This is the starting point because everything downstream, including self-employment tax, the qualified business income deduction, and the New York overlays, follows from classification.

Sole proprietorships and general partnerships are the simplest and the most exposed entity types. Income passes through to the owners and is taxed once at individual rates, but it also carries the full weight of self-employment tax: currently, 12.4 percent for Social Security up to the wage base, 2.9 percent for Medicare with no cap, and an additional 0.9 percent Medicare surtax on earnings above $250,000 for joint filers and $200,000 for single filers. That tax reaches a sole proprietor’s entire business income and a general partner’s full distributive share of the firm’s trade or business income. These entity types also provide no liability protection, which is why most established design firms move beyond them.

PLLCs and Limited Liability Partnerships (“LLPs”) taxed as partnerships are the workhorses of professional practice. Income passes through and is taxed once to the members or partners, distributions are generally not a second layer of tax, and the structure is flexible on allocations, capital accounts, and admitting new owners. The self-employment tax question is more nuanced here. Guaranteed payments to a partner for services rendered remain subject to self-employment tax, and the Internal Revenue Code preserves that result even for limited partners. Whether a professional member’s distributive share beyond guaranteed payments escapes self-employment tax is an unsettled area, and firms should model it with their tax advisors rather than assume a favorable answer.

The S corporation election is often the classic employment-tax planning tool. A Professional Corporation (“PC”) or a PLLC that elects S status pays its owner-employees a salary and can distribute remaining profits as distributions that are not subject to self-employment or payroll tax. The salary must be reasonable compensation for the services actually performed because the Internal Revenue Service (“IRS”) scrutinizes thin salaries paired with large distributions. However, the spread between a defensible salary and total profit can produce real employment-tax savings. S corporations carry eligibility limits: no more than 100 shareholders, only eligible individual (and certain trust and estate) shareholders, no nonresident alien shareholders, and a single class of stock. Those limits rarely bind a closely held design firm, but the single-class-of-stock rule constrains how flexibly owners can be given different economics. S corporations also have considerable drawbacks with respect to distributions of property. Therefore, as a general rule, real property should not be held in an S corporation. A dual-entity structure should be considered if the design professionals own the real property.

C corporations, including a PC that does not elect S status, are taxed at the entity level at a current flat rate of 21 percent, and then again at the shareholder level when earnings are distributed as dividends. This is the familiar double tax. Design professionals should note one piece of history: architecture and engineering firms are “qualified personal service corporations,” a category that once carried a punitive 35 percent flat corporate rate. The 2017 tax law repealed that special rate, so a professional C corporation is now taxed at the same 21 percent as any other corporation. Even so, the second layer of tax on distributions makes the C corporation an uncommon choice for a practice that intends to pay its profits out to its owners each year.

The qualified business income (“QBI”) deduction is the key federal benefit, and it favors this profession in a way many owners do not realize. Section 199A allows owners of pass-through businesses a deduction of up to 20 percent of qualified business income. For most high-earning professional service firms, such as lawyers, doctors, accountants, and consultants, that deduction phases out entirely because they are “specified service” businesses. Architecture and engineering are deliberately carved out of that penalty box. The statute defines specified service businesses by borrowing a list that expressly omits “engineering, architecture,” and the regulations confirm that architecture and engineering services are not treated as consulting. The practical result is significant: an architect or engineer can claim the full 20 percent deduction on pass-through income regardless of income level, subject only to a limitation tied to the firm’s W-2 wages and depreciable property once income exceeds the threshold. Because wages the firm pays and reasonable compensation to owners reduce qualified business income, and are themselves never eligible for the deduction, the interplay between an S corporation salary and the QBI deduction should be modeled together rather than optimized in isolation. 

New York State Taxes: What Considerations Should Be Made with Respect to State Taxes?

New York generally follows the federal pass-through pattern, then adds its own entity-level charges. For owners, each item of partnership or S corporation income keeps the same character on the New York return as on the federal return, so pass-through income is taxed once, at the owner level, under the State’s personal income tax. Resident owners are taxed on their full share; nonresident owners are taxed only on the portion sourced to New York, and the firm must generally remit estimated tax on their behalf. 

Firms taxed as partnerships owe an annual filing fee, not a true income tax, on a sliding scale tied to New York-source gross income. Corporations face the Article 9-A franchise tax, and here the entity choice matters. A C corporation pays the highest of three amounts: a tax on its apportioned business income, a tax on its capital, or a fixed dollar minimum. Through 2029, the business income base is currently 6.5 percent, rising to 7.25 percent for taxpayers with more than $5 million of business income. The capital base is being phased out and reaches zero for tax years beginning in 2030. 

Two features of the New York S election can have unexpected pitfalls. First, New York does not automatically follow the federal S election; the shareholders must make a separate New York election, and it is effective only if every shareholder consents. A firm that elects S status federally but neglects the New York election can find itself taxed as a C corporation in New York. Second, the election can be forced on a firm it did not want it: if an eligible S corporation’s investment income exceeds 50 percent of its federal gross income, the shareholders are deemed to have made the New York S election for the entire year. That trap is worth watching for a firm that holds significant passive investments alongside its practice. Though, in that circumstance, an S corporation election probably is not the best choice.

New York City Taxes: What Considerations Should Be Made with Respect to City Taxes

New York City is where entity choice can swing a firm’s tax bill the most, because the City taxes unincorporated businesses and corporations under entirely different regimes — and, critically, does not recognize S corporation status. A firm that assumes its federal and State pass-through treatment carries into the City is often surprised.

An unincorporated design practice, including a sole proprietorship, a partnership, or a PLLC or LLP taxed as a partnership, is currently subject to the Unincorporated Business Tax (“UBT”) at 4 percent of its unincorporated business taxable income. The UBT is imposed on the firm itself; it is an entity-level tax that a pass-through firm does not face at the State level. The courts have upheld its application to self-employed professionals. The statute softens the edge for small practices. For a professional partnership whose partners include a professional corporation, an exemption prevents the same income from being taxed twice at the City level. Whether an owner may credit the City’s UBT against City personal income tax is a further layer that partners should confirm, because the UBT is not fully creditable in all cases and can be a real incremental cost of practicing in the five boroughs.

Corporations pay the City’s Business Corporation Tax instead of the UBT, and this is where the S corporation distinction has negative consequences. For federal and State purposes an S corporation is a pass-through entity. New York City does not honor that election and taxes the corporation at the entity level, recognizing S corporations as taxable entities rather than passing their income through to shareholders. The City generally follows federal tax classification in deciding which regime applies: an LLC that elects to be taxed as a corporation is a corporation for City tax, while an LLP or PLLC taxed as a partnership pays the 4 percent UBT like any partnership. The upshot for a firm operating in the City is that there is no pass-through escape hatch, which means that the practice will pay some form of entity-level City tax whether it is organized as a partnership (UBT) or as a corporation (Business Corporation Tax), and the comparison between the two, including creditability against owners’ City income tax, should be run before the entity is chosen.

The New York Pass-Through Entity Tax (“PTET”) Election: How can the PTET Can Be a Significant Benefit?

The pass-through entity tax, or PTET, is the most important tax election a New York design firm can make, and it exists to solve a problem the 2017 federal tax law created. That law, as amended in 2025, capped an individual’s deduction for state and local taxes, which hit New York owners hard. But the cap does not apply to state and local income taxes paid in carrying on a trade or business, and the IRS confirmed that a state income tax imposed on and paid by a partnership or S corporation is deductible by the entity and is not subject to the individual cap. New York built its PTET to fit this guidance. The firm pays New York income tax at the entity level, deducts it federally without limitation, and the owners take a matching credit on their New York returns so they are not taxed twice.

The mechanics are straightforward once the concept is clear. Eligible entities taxed as partnerships and eligible New York S corporations may make the election. The election is annual and, once the deadline passes, irrevocable; it must be made by the due date of the first estimated payment, which effectively sets a hard calendar. Estimated payments are due quarterly and at graduated rates that currently range from 6.85 percent up to 10.90 percent on the firm’s pass-through entity taxable income. Each owner then claims a New York personal income tax credit equal to that owner’s direct share of the PTET the firm paid, and any excess is refundable. An electing S corporation should note a certification wrinkle: it must certify that all shareholders are New York residents to be treated as a “resident” S corporation and capture the broader benefit; without that certification it defaults to standard treatment on New York-source income only. 

New York City offers a parallel election. A firm that has made the State PTET election may also elect the City PTET. The City election piggybacks on the State election and it delivers the same benefit, provided the State PTET election has been made: a federal deduction at the entity level and a matching City personal income tax credit to the owners. For a design firm with New York City owners, electing both the State and City PTET is often the single largest tax saving available, and the annual deadlines make it something to calendar early rather than revisit at filing time.

A Tax-Aware Path Forward

Every architectural and engineering practice is different, but a disciplined sequence gets a firm to the right tax answer:

• Confirm the licensing-permitted forms first (PC, DPC, PLLC, LLP), then layer the tax analysis on the forms that are actually available.
• Choose a federal classification with eyes open: pass-through partnership treatment for flexibility, an S corporation election where reasonable-compensation planning justifies the employment-tax savings, and a C corporation only where the firm has a specific reason to retain earnings at the entity level.
• Capture the qualified business income deduction. Architecture and engineering firms are not specified service businesses, so the full 20 percent deduction is available. Coordinate owner compensation and wages so an S corporation election does not inadvertently reduce this benefit. 
• Make the New York S election deliberately if it is the best choice.  Do not assume the federal election carries over, and watch the investment-income trap that can force it. 
• Model the New York City cost, including UBT for unincorporated firms, Business Corporation Tax for corporations, remembering the City does not recognize S status, before committing to a form for a City practice
• Elect the State and, where applicable, City PTET each year, and calendar the estimated-payment deadlines that fix the election. 
• Revisit the whole analysis annually and whenever ownership, revenue, or the mix of New York and out-of-state work changes.

Conclusion

For architects and engineers, entity choice is a tax decision as much as a licensing or liability one. The profession enjoys a genuine federal advantage in the qualified business income deduction, faces a distinctive New York City regime that does not recognize S corporations, and has, in the pass-through entity tax, a powerful tool to restore a federal deduction the 2017 law removed. None of these pieces should be evaluated alone; the right structure balances them across multiple years and adjusts as the firm grows. Our team helps design firms align licensing, liability, and tax into a coherent platform at formation, during growth, and through transition. To discuss your firm’s structure or an upcoming change, contact us for a confidential consultation.

Frequently Asked Questions

Do architects and engineers qualify for the 20% QBI deduction?

Yes, and unlike most professional service firms, they qualify in full regardless of income. Section 199A denies the deduction to “specified service” businesses such as law, medicine, and accounting once income passes a threshold, but architecture and engineering are expressly carved out of that penalty and are not treated as consulting. Above the income threshold, the only remaining limit is the cap tied to the firm’s W-2 wages and depreciable property. 

Is an S corporation worth it for a New York design firm?

Often, but not automatically. An S corporation lets owner-employees take a reasonable salary and receive remaining profit as distributions free of self-employment and payroll tax, which can produce real savings on the spread between a defensible salary and total profit. Two cautions: the salary must withstand IRS scrutiny, and because wages reduce qualified business income, the S corporation salary and the QBI deduction must be modeled together rather than optimized separately. 

Does New York City recognize S corporation status?

No. New York City does not honor the federal or State S election and taxes an S corporation at the entity level under its Business Corporation Tax, as if it were a C corporation. A firm that assumes its federal and State pass-through treatment carries into the City is often surprised — there is no pass-through escape hatch, so a City practice pays some form of entity-level tax whether it is a partnership (4% Unincorporated Business Tax) or a corporation 

What is the New York PTET, and how much can it save?

The PTET lets the firm pay New York income tax at the entity level and deduct it federally without the SALT limitation, while owners take a matching, refundable credit on their New York returns so the income is not taxed twice. It exists to restore a federal deduction the 2017 SALT cap (as amended in 2025) removed, and for a firm with New York City owners who can layer a parallel City PTET on top once the State election is made. It is often the single largest tax saving available. 

Should a PLLC or an S corporation hold the firm’s real estate?

Not an S corporation. S corporations carry significant drawbacks on distributions of property, so as a general rule real property should not be held inside one. If the design professionals own real estate, a dual-entity structure, typically holding the property in a separate partnership-taxed entity such as an LLC, should be considered. 

What entity should an architecture or engineering firm in New York City choose?

There is no single right answer, as the analysis turns on the firm’s economics. Start with the licensing-permitted forms (PC, DPC, PLLC, LLP), then choose a federal classification: partnership treatment for flexibility, an S corporation where reasonable-compensation planning justifies the employment-tax savings, and a C corporation only for a specific reason to retain earnings. Then capture the full QBI deduction, model the New York City cost (Unincorporated Business Tax versus Business Corporation Tax, remembering the City does not recognize S status), and elect the State and, where applicable, City PTET each year. 

Mr. Shimick is a Partner at Whiteman Osterman & Hanna, LLP. You can contact him at (518) 487-7678 or by email at sshimick@woh.com.

Disclaimer: This post provides general information for educational purposes and is not legal, tax, or accounting advice. Tax rates, thresholds, and elections change; consult qualified counsel and tax advisors about your firm’s specific circumstances.

Last updated August 19, 2026