How does an S-corp election save self-employment tax?

A sole proprietor or single-member LLC pays 15.3% self-employment tax (IRC §1401) on 92.35% of net business income. An S-corporation splits income into reasonable W-2 wages, which are subject to FICA payroll tax, and remaining distributions, which are not subject to self-employment or FICA tax. When profit exceeds a reasonable salary, taxing only the salary can reduce the total payroll-tax burden. The savings must be weighed against the cost of running compliant payroll and filing a separate Form 1120-S.

What is reasonable compensation for an S-corp owner in 2026?

The IRS requires S-corporation owner-employees who perform services to pay themselves reasonable compensation before taking distributions (IRC §§3121, 1366; Rev. Rul. 74-44). Reasonable compensation reflects the role, experience, time devoted, and comparable wages for similar work in the same industry and region. Setting the salary artificially low to avoid payroll tax is a recognized audit risk, and the IRS can recharacterize distributions as wages.

What is the 2026 Social Security wage base?

For 2026 the Social Security (OASDI) wage base is $184,500, up from $176,100 in 2025 (IRS Topic No. 751). Social Security tax of 12.4% applies to net self-employment earnings or W-2 wages up to that cap, while the 2.9% Medicare portion applies to all earnings with no cap. An Additional Medicare Tax of 0.9% applies above $200,000 (single) or $250,000 (married filing jointly).

Does the S-corp election make sense at every income level?

No. Below roughly $40,000 to $50,000 of net profit, the payroll-tax savings are often absorbed by the cost of running payroll, additional tax preparation, and California's 1.5% S-corporation franchise tax with an $800 annual minimum. The election generally becomes advantageous as profit rises meaningfully above a reasonable salary.

James Stillion CPA

Should you elect S-corp status?

Estimate the self-employment tax you could save by electing S-corporation treatment — after accounting for a reasonable salary and the real cost of running payroll. Built for California owners by a CPA.

Inputs

Annual net business profit Net earnings before any owner salary

Reasonable salary (W-2 wages) What you'd pay someone to do your job

Filing status Affects the additional-Medicare threshold Est. annual payroll / admin cost Payroll service, extra filings, bookkeeping

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The savings above assume the salary you entered is defensible. The actual figure depends on your reasonable-compensation analysis, your state filing posture, the cost of running compliant payroll, and how distributions interact with the rest of your return. That's the part a calculator can't see — and exactly what an S-corp analysis engagement covers.