How the comparison works
As a sole proprietor (or single-member LLC), the whole profit carries self-employment tax: 15.3% of 92.35% of it, up to the $184,500 Social Security wage base. Income tax is on the profit after half that tax, the standard deduction and the qualified business income deduction.
As an S-corp, you are an employee of your own company. The salary carries Social Security and Medicare, both halves, and the company deducts its half. What’s left of the profit after the salary, that employer half and the running costs passes through to your return without payroll tax. Income tax runs on salary plus pass-through, with the qualified business income deduction on the pass-through share.
On the example, $100,000 of profit and a $50,000 salary: $26,243 as a sole proprietor against $24,254 as an S-corp, including $2,500 of running costs. About $1,989 a year in favor of the S-corp.
What it leaves out
State-level S-corp taxes and fees (California’s 1.5% franchise tax and $800 minimum, for example), unemployment insurance on the salary, retirement contributions (which an S-corp salary changes), and the qualified business income deduction’s W-2 wage credit above $201,750 of taxable income ($403,500 joint), which it leaves out, so at high incomes the S-corp may save a little more than shown. The decision has enough moving parts to deserve an hour with an accountant; this tells you whether it’s worth booking.
Questions, answered
How much does an S-corp save in taxes?
It depends on the gap between your profit and a reasonable salary. As an S-corporation, only the salary you pay yourself carries the 15.3% Social Security and Medicare tax; the rest of the profit does not. Against that come payroll, an extra tax return and often state fees. On $100,000 of profit with a $50,000 salary, the saving after about $2,500 of costs is roughly $2,000 a year (single filer, 5% state tax).
At what income does an S-corp make sense?
There is no single number, but many accountants start the conversation when steady profit passes roughly $60,000 to $80,000 a year. Below that, the salary you must pay yourself leaves little profit outside payroll tax, and the running costs eat most of the saving.
What is a reasonable salary for an S-corp owner?
What you would have to pay someone else to do your job, which the IRS can challenge if it looks too low. Industry pay data, the hours you work and what the business earns all count. A salary set artificially low to avoid payroll tax is the most common S-corp audit issue.
Does an S-corp change my income tax?
Not much. Salary and the pass-through profit are both taxed as ordinary income on your personal return. The saving is almost entirely payroll tax. The qualified business income deduction can apply to the pass-through share, not the salary.
Sources
- S corporations — IRS. How an S-corporation is taxed, and the reasonable-compensation rule.
- Wage compensation for S corporation officers — IRS. What counts as a reasonable salary.
- Rev. Proc. 2025-32 (PDF) — IRS. 2026 brackets, standard deduction and qualified business income thresholds.
- Contribution and benefit base — Social Security Administration. The $184,500 wage base for 2026.
