S-Corp vs Sole Proprietor Calculator

The saving, and then the catch

The pitch is simple and it is real. A sole proprietor pays self-employment tax on all the profit — 15.3% up to the Social Security wage base of $184,500 for 2026, then 2.9% Medicare with no ceiling. An S-corporation owner pays payroll tax only on the salary they take; the rest comes out as a distribution with no payroll tax at all. Take a $65,000 salary out of $140,000 of profit and you have removed $75,000 from the payroll tax base.

Here is the part that is usually left out. The qualified business income deduction under §199A gives you up to 20% of your business income as a deduction — and a salary is not qualified business income. It is wages. So every dollar you move from distribution to salary is a dollar that leaves the 20% deduction.

On the default figures that shrinks the §199A deduction by $9,276, which at a 22% bracket is $2,041 of real tax. Against a payroll saving of $9,836 that is not fatal, but it is a fifth of the benefit gone before you have paid the accountant — and a calculator that omits it is overstating the prize.

Note that the two figures above are both tax. It is easy to be misled here by tools that put a deduction amount next to a tax amount and let them look comparable; a $9,276 deduction is not a $9,276 saving, it is worth your marginal rate on it. This page prices the QBI effect in tax for exactly that reason.

Above the threshold it flips completely

Now the more interesting direction, and the one that changes real decisions.

Once your taxable income passes $201,750 single or $403,500 married filing jointly for 2026, the §199A deduction stops being a simple 20% and becomes capped by the W-2 wages your business paid — specifically the greater of 50% of wages, or 25% of wages plus 2.5% of the cost of qualifying property. A sole proprietor pays no W-2 wages to themselves. None. So above the phase-in range their deduction is limited to essentially zero.

An S-corporation owner paying themselves a salary has W-2 wages by definition. Those wages unlock the deduction that a sole proprietor cannot reach at all. So at higher incomes the §199A effect stops being a cost of electing and becomes a second reason to elect, stacked on top of the payroll saving. The chart above shows the curve steepening for exactly this reason.

There is a real optimisation buried in there. Below the threshold you want the lowest defensible salary, because salary destroys QBI. Above it you may want a higher salary, because salary creates the wages that support the deduction. The usual advice to "pay yourself as little as you can justify" is right for one group and wrong for the other.

One more asymmetry worth knowing, because it surprises people who assume the two structures are equivalent at the extremes. Self-employment tax is charged on 92.35% of profit, not all of it — that is the deduction for the employer half built into the formula. Payroll tax is charged on 100% of a salary. So an S-corporation owner who pays out the entire profit as salary ends up paying more than a sole proprietor would, by roughly 1.2% of the profit, before any running costs. The election only helps to the extent that something is left over as a distribution.

If you are a specified service business

Consultants, lawyers, accountants, doctors, financial advisers, performers and athletes fall into what the statute calls a specified service trade or business, and for them §199A behaves differently again. Above the threshold the deduction does not merely get capped by wages — it phases out entirely over the range, reaching zero at $276,750 single or $553,500 jointly. No amount of salary rescues it.

For a high-earning SSTB the QBI question therefore drops out of the comparison altogether, because the deduction is gone under either structure. What is left is the payroll tax saving against the running costs — which usually still favours electing, but for a simpler reason than the pitch suggests. Set the toggle above and you can watch the QBI line disappear.

What it costs to run

An S-corporation is not a tax election so much as a second business to administer. You must run actual payroll — filings each quarter, W-2s in January, withholding remitted on time. You file a separate Form 1120-S and issue yourself a K-1. Many states levy a franchise or minimum tax regardless of profit; California charges 1.5% of net income with an $800 floor, and several others have their own.

Budget $1,500 to $3,500 a year for payroll service and the extra return, more if your accountant charges properly for the K-1. That is a recurring cost against a recurring saving, so the arithmetic only works above a certain profit — the calculator finds that crossover for your own salary ratio rather than repeating the usual "$40,000 to $60,000" rule of thumb, which was never based on your numbers.

There is also a cost that does not appear on any invoice: the election is a commitment. Revoking it and re-electing within five years generally requires IRS consent, and running payroll badly is worse than not running it at all. If your profit is volatile enough that a bad year would put you below the crossover, that volatility is itself an argument for waiting.

Reasonable compensation is the real risk

This is where S-corporations go wrong, and it is worth being blunt.

There is no safe harbour and no percentage rule. Not 60/40, not 50/50, not any of the ratios you will find quoted confidently on accounting websites. Those numbers have no basis in the statute, the regulations or the case law. The standard is what the corporation would have to pay someone else to do the work you do, judged on your duties, the hours you put in, your training and experience, what comparable businesses pay for comparable roles, and what the business could afford.

When the IRS decides a salary was unreasonably low it recharacterises distributions as wages, and the bill is back payroll tax plus interest plus penalties — often across several years at once, because the same pattern repeats annually. The saving that made the election attractive is exactly what gets clawed back, with interest.

The practical protection is documentation you make at the time: what comparable roles pay in your market, what your duties actually are, and why the figure you chose reflects them. A salary you can explain in a sentence to a stranger is defensible. A salary chosen because it was 40% of profit is not, because the reasoning has nothing to do with the work.

What this calculator leaves out

It compares a single tax year at steady profit, and several things sit outside that frame. Retirement contributions change under an S-corp — employer contributions are based on W-2 wages rather than net profit, which can cut how much you can put away and is worth checking against our retirement plan calculator. Health insurance premiums for a more-than-2% shareholder have to run through payroll and be included on your W-2 to stay deductible, which our health insurance page touches on. Qualified property is assumed to be zero, so the 2.5% UBIA prong of the wage limitation does not apply; capital-intensive businesses should account for it. And state treatment of S-corporations varies enormously — a few do not recognise the election at all.

The honest summary is that the election is usually worth less than it is sold as at profits under about $80,000, clearly worth it somewhere above that, and genuinely valuable at higher incomes for a reason most people have never been told — the wages it creates are what make the §199A deduction reachable at all.

Frequently asked questions