The case for the S-corp election almost always starts with one number: 15.3 percent. That is the self-employment tax rate a sole proprietor pays on every dollar of net business income, covering both the employee and employer sides of Social Security and Medicare. The S-corp election does not eliminate that tax. It applies it to a smaller base.
The savings come from the gap between what you pay yourself as a salary and what the business actually earns, and understanding exactly how wide that gap is in your situation determines whether the election makes financial sense.
This post runs the actual numbers at three income levels using 2026 rates, explains why the math changes as income grows, and identifies where the savings stop compounding.
Before comparing structures, the starting point is understanding what self-employment tax costs under the default arrangement.
As a sole proprietor or single-member LLC taxed as a disregarded entity, every dollar of net business profit flows to Schedule C of your personal return. The IRS applies self-employment tax to 92.35 percent of that net profit, not 100 percent. The 92.35 percent figure exists because employers can deduct their half of payroll taxes as a business expense, so sole proprietors receive an equivalent adjustment on the calculation.
For 2026, the self-employment tax rate breaks down as:
At $100,000 in net profit, a sole proprietor pays approximately $14,130 in self-employment tax. At $150,000, the bill is approximately $21,200. At $250,000, it climbs to approximately $29,500, though the Social Security portion begins to level off as earnings approach and exceed the wage base.
That self-employment tax gets added to whatever income tax the owner owes at their individual rate. Sole proprietors can deduct half of the self-employment tax paid as an above-the-line adjustment to income, which reduces the income tax calculation slightly, but the core obligation does not change.
Tip: The self-employment tax deduction reduces your adjusted gross income, which can affect other calculations on your personal return, including the QBI deduction threshold and certain credits. It is not a large number, but it is worth making sure your CPA is applying it correctly.
When a business elects S-corp tax treatment, the income no longer flows entirely through Schedule SE. The owner pays themselves a W-2 salary, and payroll taxes apply at the same 15.3 percent rate on that salary amount. The remaining profit distributes to the shareholder through a K-1. Distributions are subject to income tax but not to self-employment tax or payroll taxes.
The savings are exactly 15.3 percent of whatever amount is legitimately taken as a distribution rather than salary, up to the point where the Social Security portion of the wage base phases out. Above $184,500, only the 2.9 percent Medicare rate applies to both salary and distributions, so the marginal savings on income above that level are smaller.
The employer half of payroll taxes on the salary is deductible as a business expense for the S-corp, which reduces the ordinary income flowing through the K-1. That is a small additional benefit on top of the primary self-employment tax savings.
Tip: Income tax applies equally in both scenarios. Whether you earn $200,000 as a sole proprietor or $200,000 split between salary and S-corp distributions, the total income tax burden is similar. The savings come entirely from self-employment tax, not income tax.
The clearest way to understand the savings is to run the same income through both structures at realistic salary levels. These figures use 2026 rates and reflect typical reasonable compensation ranges documented by industry salary data.
At $100,000 in net profit with a $55,000 salary:
As a sole proprietor: self-employment tax on $100,000 is approximately $14,130.
As an S-corp: payroll taxes on a $55,000 salary come to approximately $8,415. The remaining $45,000 in distributions avoids self-employment tax entirely. Total payroll tax: $8,415.
Gross savings: approximately $5,715. After subtracting estimated compliance costs of $3,500 to $4,000 per year for payroll processing and the Form 1120-S filing, net annual savings land around $1,700 to $2,200. The election is beneficial but not dramatically so at this income level, and the financial case depends heavily on what the compliance actually costs.
At $200,000 in net profit with a $90,000 salary:
As a sole proprietor: self-employment tax on $200,000 is approximately $26,800, including the Medicare surcharge above $200,000.
As an S-corp: payroll taxes on a $90,000 salary come to approximately $13,770. The remaining $110,000 in distributions avoids self-employment tax. Total payroll tax: $13,770.
Gross savings: approximately $13,030. After compliance costs of $4,000 to $5,000, net annual savings are approximately $8,000 to $9,000. At this income level, the election produces clear, meaningful savings that grow as profit increases.
At $350,000 in net profit with a $130,000 salary:
As a sole proprietor: self-employment tax on $350,000 runs approximately $34,400, with the Social Security portion capped at the $184,500 wage base and Medicare applying on the remainder.
As an S-corp: payroll taxes on a $130,000 salary come to approximately $19,890, which covers the full Social Security contribution at that salary level. The remaining $220,000 in distributions avoids FICA entirely. Total payroll tax: $19,890.
Gross savings: approximately $14,510. After compliance costs, net annual savings land around $9,500 to $11,000. The savings curve begins to flatten above the Social Security wage base because that component of the tax no longer applies to additional salary dollars, reducing the marginal benefit of taking income as distributions rather than wages.
Tip: The savings illustrated above are gross estimates before your specific reasonable salary, state taxes, and compliance costs are factored in. The actual number for your business requires a calculation based on your role, industry, and what the market pays for your services. A reasonable salary set too low to maximize the savings is not defensible, and the IRS knows what your role should pay.
A point that most S-corp comparisons underemphasize is where the savings plateau. Once your total income, salary plus distribution, exceeds the Social Security wage base of $184,500, the 12.4 percent Social Security component no longer applies to additional earnings in either structure. Above that level, only the 2.9 percent Medicare tax applies to salary, and distributions avoid even that.
For a business owner earning $400,000 or more, the marginal self-employment tax saving on dollars above $184,500 shrinks from 15.3 percent to 2.9 percent. The S-corp structure still produces meaningful total savings at those income levels because the cumulative benefit on the first $184,500 is substantial, but the incremental benefit of additional income flowing as distributions rather than salary is much smaller above the wage base.
This is also why the S-corp election is less compelling for passive income. Rental income and investment income flowing from a sole proprietorship are not subject to self-employment tax in the first place. The S-corp structure generates savings specifically on active business income subject to self-employment tax, and passive income does not qualify.
Tip: If you earn both active business income and significant passive income, the two need to be evaluated separately when modeling whether the S-corp election makes financial sense. The active income calculation and the passive income calculation use different starting points, and combining them into a single comparison produces a misleading result.
Every comparison between sole proprietor and S-corp taxation needs to include compliance costs on the S-corp side. The election does not come free.
Running an S-corp requires:
For most business owners, total annual compliance costs fall between $3,500 and $5,000. That figure comes directly off the gross savings calculation. A business earning $100,000 in net profit with $5,715 in gross self-employment tax savings and $4,500 in compliance costs is netting roughly $1,200 per year from the election. That is not nothing, but it is a different conversation than the headline savings number suggests.
Tip: Ask your CPA for a specific compliance cost estimate based on your actual payroll complexity and the effort involved in preparing your 1120-S tax return, not a generic range. The difference between a $3,500 total and a $5,500 total can determine whether the election makes sense at your income level.
The S-corp election produces real self-employment tax savings for business owners above the threshold where compliance costs are covered by the reduction in payroll taxes. For most professionals, that threshold lands around $75,000 to $80,000 in net annual profit. Below that level, the math is close or negative. Above it, the savings grow with income until the Social Security wage base creates a ceiling on how much the distribution structure can save.
At TrueView CPA, S-corp tax preparation and S-corporation tax filing services for business owners across Dallas and Texas start with a conversation about your actual numbers, not a generic calculation. If you want to know what the S-corp election would save your specific business in 2026 based on your income, your industry, and what a defensible salary looks like for your role, that is exactly the kind of question we build a consultation around.
Want to know if an S-Corp could lower your self-employment taxes? Schedule a call with our tax experts today.
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