Probably yes, by less than you have been told, and not at all below a certain profit. A sole proprietor pays self-employment tax on nearly all of the profit: 15.3% charged on 92.35% of it, which is 14.13% of the lot. An S-corp owner pays payroll tax on a salary and takes the rest as a distribution, and a distribution carries no payroll tax. That is the saving, and that is the whole of the saving. Then the S-corp starts charging you rent.More
Two things get left out of the version you have read. The first is that the usual sum, 14.13% of your distribution, is always too high, for two separate reasons. One: the 92.35% step lives only in self-employment tax; payroll tax on a wage is charged on every dollar of the wage. So the salary you pay yourself is taxed at 15.3% where that same money, left as sole-proprietor profit, would have been taxed at 14.13%. You hand back 1.17% of the salary, which on the numbers this page starts with is $796 of a promised $7,347. Two, and this one is bigger, and we shipped this page once without it: the usual sum charges you self-employment tax on every dollar of profit forever, and the real tax stops at the social security wage base. Once your profit passes $199,783 the base is full, and from there the usual sum overstates by a further 11.45% of every dollar of profit above it. That term is zero on the numbers this page starts with, which is exactly why it is so easy to miss, and it is the larger of the two for anyone earning enough to be seriously asking this question. The second thing left out is the rent. An S-corp needs a payroll service, its own tax return on Form 1120-S, books that somebody will stand behind, and in some states an annual fee. None of that gets cheaper when your profit falls, so there is a level of profit below which the election is simply a bill. On the defaults here that level is $92,742, and the whole job of this page is to find it for your numbers rather than ours. And then there is the part nobody enjoys: the salary is not yours to choose. The IRS requires it to be reasonable for the work you actually do, it can reclassify a distribution back into wages, and the court cases are on its side. Setting the salary low to shrink the tax is the way this election goes wrong.
What the election is worth, after what it costs
$3,851
Payroll tax you would stop paying, because a distribution does not carry any$6,551
What an S-corp costs to run every year, whether it saves you anything or not-$2,700
The saving is real, it is smaller than the sum you have read, and it has a floor of fixed costs
underneath it. A sole proprietor pays 15.3% self-employment tax on 92.35% of the profit, which is 14.13% of
the profit. An S-corp pays payroll tax on the salary and nothing at all on the distribution. On this page's starting
numbers that saves $6,551 of payroll tax, and then payroll, the Form 1120-S return and the books take $2,700 of it
straight back.More
Why the usual sum is always too high, and by exactly how much. The version doing the rounds
is "14.13% of your distribution", which on these numbers is $7,347. The real saving is $6,551. The difference is
$796 and it is not a rounding error: it is the 92.35% step, which exists ONLY in self-employment tax. Payroll tax on
a wage is charged on every dollar of the wage, half withheld from you as the employee and half paid by you as the
employer. So the salary is taxed at 15.3% where the same money, left as sole-proprietor profit, would have been
taxed at 14.13%. You give back 1.17% of whatever you pay yourself, and you give it back on the first dollar.
And above $199,783 of profit there is a second gap, and it is the bigger one. "14.13% of your
distribution" quietly assumes you were paying self-employment tax on every dollar of profit. You were not. Social
security stops at the wage base, so once your profit fills it the usual sum is inventing a tax you had already
stopped paying: a further 11.45% of every dollar of profit above $199,783, which is the social security slice of
that 14.13%. Below the base this term is zero, which is why it hides on a page's default numbers, and above it, it
is larger than the salary term. The two cells above, what the usual arithmetic promises and what you actually save,
already have both of these in them: the calculator has always been right about the total, and this paragraph is the
part we had only half written.
The fixed costs are the part that decides it. Payroll service, a separate return, books that stand
up, and in some states an annual fee. They do not shrink when your profit does, so there is a level of profit below
which the election costs more than it saves. On the defaults here it is $92,742 of net profit. Below that, an S-corp
is a bill. That number moves with every cost box on this page, which is why they are boxes and not assumptions.
And the salary is not yours to choose. The IRS requires it to be reasonable for the work, it can
reclassify a distribution back into wages, and court cases support the authority. A salary set low to shrink the tax
is the way this goes wrong. We will not suggest a number and we will not suggest a percentage, because we do not
know your job and there is no such figure to give.
§ 02 The saving, and the rent
Self-employment tax you pay now, on nearly all of the profit$16,955
Payroll tax on the salary instead, once you elect$10,404
Payroll tax saved, before a penny of the costs$6,551
The break-even profit: below it, the election is a bill$92,742
What the usual arithmetic promises, which is always more than the truth$7,347
Payroll tax only, federal only, tax year 2026. This page compares the self-employment tax a sole proprietor pays on profit against the payroll tax an S-corp pays on a salary, and subtracts what the corporation costs to run. It does NOT model income tax, it does NOT model the QBI deduction, and it does NOT model any state's rules. Every tax figure is the IRS's. Every cost figure is ours, and they are placeholders you should replace. The salary is yours, and the IRS decides whether it was reasonable, not us and not you.
Recommended next steps
At this profit the arithmetic works, and the interesting question is no longer whether to elect but what salary you can defend. That is the number the IRS looks at, it is the number this page refuses to guess for you, and it is worth an hour of an accountant's time. Take these figures with you: your profit, the salary you think the work is worth, and a real quote for payroll and the 1120-S. Remember what is not in this page: income tax, the QBI deduction and your state, and QBI in particular can take back part of what you see here.
A sole proprietor pays self-employment tax on 92.35% of the profit at 15.3%, which is 14.13% of the profit.More
The rate is 12.4% for social security plus 2.9% for Medicare, and it is charged on 92.35% of net earnings rather than all of them (Form 1040-ES, 2026, self-employment tax worksheet). Multiply the two together and the effective bite is 14.13% of every dollar of profit. That is the tax an S-corp election is trying to get away from. This page models that tax and then it stops.
An S-corp owner pays payroll tax on the salary. The distribution carries none. That is where the whole saving comes from.More
The IRS's own words, on its S corporation compensation page: it has the authority to reclassify payments made to shareholders from non-wage distributions, which are not subject to employment taxes, to wages, which are subject to employment taxes. Read that sentence twice, because it contains both halves of this page: the distribution really does escape payroll tax, and the IRS really can decide that your distribution was a wage.
The usual sum, 14.13% of your distribution, is always too high, and below the wage base it is too high by exactly 1.17% of the salary.More
Because the 92.35% step exists only in self-employment tax. Payroll tax on a wage is charged on the whole wage: half withheld from you as an employee, half paid by you as the employer, and you are both. So a dollar of salary carries 15.3% where a dollar of sole-proprietor profit carried 14.13%. The difference, 1.17%, is a penalty you pay on every dollar of salary, and it comes off the top of the saving before you have paid a single running cost. On the defaults here it is $796 of a promised $7,347. NOTE THE BOUND IN THE SENTENCE ABOVE, because we did not have it here at first and the omission was the same kind of error this page exists to correct: 1.17% of the salary is the whole of the gap only while your profit is below the wage base.
Above $199,783 of profit the usual sum is wrong a second time, and worse.More
The sole proprietor's social security tax stops at the wage base. The sum you have read does not: it charges 14.13% on every dollar of distribution however large the profit, as though social security ran forever. It does not. So above the profit that fills the base, that sum overstates by a further 11.45% of every dollar of profit above it, which is the social security part of the 14.13% and which you had already stopped paying. Worked, on this page's own compute: at $400,000 of profit with the salary left at $68,000, the usual sum promises $46,910 and the real payroll tax saving is $23,187. It is out by $23,724. Only $796 of that is the salary penalty. The other $22,928 is the wage base. The calculator above has always had this right, because it caps social security where the statute caps it. It was this page's WORDS that named the salary penalty as the whole of the gap, when it is a thirtieth of it here.
An S-corp costs real money to run, and the cost does not care how much you earned.More
A payroll service, because you are now an employee and there has to be a payroll. A separate tax return on Form 1120-S, because the corporation files its own, in March, before your personal return is due, and it issues you a Schedule K-1 that then goes on your 1040. Bookkeeping somebody will stand behind, because a corporation with a payroll is a harder thing to keep straight than a spreadsheet. Unemployment tax on your own wages, which a sole proprietor's drawings never attract. And in some states an annual fee for the privilege of existing. On our placeholder numbers that is $2,700 a year, and it is a floor rather than a rate: the same bill arrives whether the business had a thin year or a fat one.
So there is a break-even profit, and below it the election loses you money.More
On this page's starting numbers it is $92,742 of net profit. Below that, the payroll tax you save is smaller than the payroll tax on the salary plus the cost of running the company, and an S-corp is a bill. Above it, the saving is real and it grows with every extra dollar of profit, at 14.13% of it, until the profit reaches about $199,783 and fills the social security wage base. After that only Medicare is left and each extra dollar of distribution saves 2.68% rather than 14.13%.
1 more
The salary is not a number you choose. It is a number you have to defend.More
The IRS requires reasonable compensation for the work, and it lists factors rather than a formula: training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, payments to non-shareholder employees, timing and manner of paying bonuses to key people, what comparable businesses pay for similar services, compensation agreements, and the use of a formula to determine compensation. Notice what is not on that list: your profit. Several court cases support the IRS's authority to reclassify a shareholder's payments as wages. A salary set low to shrink payroll tax is the way this election goes wrong, and this page will not tell you what yours should be, because it depends on your job and we do not know it.
Sourced, and all of it is statute. The 15.3% (12.4% social security plus 2.9%
Medicare), the 92.35% step, the $184,500 social security wage base and the $400 floor are the IRS's own, for the
2026 tax year, read out of Form 1040-ES (2026), Schedule SE and Publication 15 rather than out of a summary. The
requirement that an S-corp owner take reasonable compensation, and the IRS's authority to reclassify a distribution
back into wages, are the IRS's own words and we quote them.
Ours, and declared: every cost box. The $600 payroll service, the $1,200 return, the $900 of
bookkeeping and the state fee that starts at zero are PLACEHOLDERS, they are not measurements, and the reader is
told to replace them with real quotes. Yours: the profit, and the salary, which is the box we
cannot help with.More
Why the cost boxes are ours and not sourced. Because nobody publishes what they cost. We
looked. All 44 JSON files in our own data directory carry no price for payroll service, bookkeeping or an 1120-S.
BLS's Current Employment Statistics does publish the hours and the hourly earnings of the people who do this work,
under NAICS 5412, monthly, and we downloaded the series catalogue and read it: that is a WAGE, which is a cost of
labour, and it is not the price of a return. It is also a bucket, because 5412 is accounting and tax preparation and
bookkeeping and payroll services all in one code, so it cannot be narrowed to the two things we are pricing. BLS's
Producer Price Index publishes an index for what certified public accountants charge for tax preparation and
planning, monthly since 1995, and an index measures the CHANGE in a price rather than the price. So the boxes are
yours, they default to numbers we made up, and we would rather tell you that than dress a guess as a benchmark.
What this page deliberately does NOT model, because doing it badly would be worse than not doing it.
Income tax, in any form. The QBI deduction, which an S-corp genuinely moves: the wages the corporation pays are
deducted from the pass-through income the 20% deduction applies to, which cuts the deduction, while above the income
threshold those same wages can lift the W-2 wage limit, which raises it. It cuts both ways and it can claw back part
of what you see here. State rules, which vary so much that a page assuming one state would be wrong everywhere else.
And one more, in the honest direction: half of self-employment tax is deductible, and so is the employer half of
payroll tax, so when your payroll tax falls, that deduction falls with it and your income tax rises a little. The
figure at the top of this page is a PAYROLL TAX saving net of running costs. It is not what lands in your bank
account, and it is not a tax return.
One place we are conservative rather than optimistic. There is a 0.9% Additional Medicare Tax above
$200,000 of income if you file single or as head of household, $250,000 if you file jointly and $125,000 if you are
married filing separately (the threshold is not one number and it is not indexed). It is charged on wages and on
self-employment income, and a distribution escapes it too. We do not model it, so wherever your salary sits below
your threshold and your profit above it, the real saving is a little larger than the number we show.
Where every number above comes from
IRS
IRS, Form 1040-ES (2026), Self-Employment Tax and Deduction Worksheet. Social security at 12.4% up to a wage base of 184,500 for 2026, Medicare at 2.9% with no cap, both charged on 92.35% of net earnings from self-employment
IRS, Schedule SE (Form 1040), Self-Employment Tax. The 92.35% step, and the floor below which no self-employment tax is owed, which is tested after that step and not before it
IRS, Publication 15 (2026), Employer's Tax Guide. Payroll tax on WAGES: social security at 12.4% up to the same 184,500 base and Medicare at 2.9%, half withheld from the employee and half paid by the employer. Note what is absent here and present in Schedule SE: there is no 92.35% step on a wage
IRS, S corporation compensation and medical insurance issues. The reasonable compensation requirement, the list of factors the IRS weighs, and its authority to reclassify non-wage distributions into wages, which several court cases support
IRS, Instructions for Form 1120-S. Who must file, when the corporation's own return is due, and the Caution to line 8: distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered
Every one of these is a place the number could be off. They are here because you should be able to check our working, not because we are hedging.
The saving modelled here is PAYROLL TAX. It is not what lands in your bank account.
Half of self-employment tax is deductible against income tax, and so is the employer half of payroll tax. When your payroll tax falls, those deductions fall with it, and your income tax rises a little in response. We do not model income tax at all, so we cannot show you that. The headline is a payroll tax saving net of running costs, and the true figure in your pocket is somewhat lower.
The QBI deduction is out of scope, and an S-corp genuinely moves it, in both directions.
The wages the corporation pays you are deducted from the pass-through income that the 20% deduction is calculated on, which shrinks the deduction. But above the income threshold, a sole proprietor with no employees has a W-2 wage limit of zero and watches the deduction phase out entirely, while an S-corp paying you a salary has W-2 wages, which can hold some of it open. Which effect wins depends on your income, your filing status and whether your work is a specified service trade or business. It can claw back a meaningful part of the saving shown here. We would rather name it and leave it out than model it badly.
The cost boxes are OURS. Every one of them is a placeholder, and the break-even moves with all of them.
The $600 payroll service, the $1,200 return and the $900 of bookkeeping are numbers we chose, because nobody publishes a price for any of them. Get three real quotes and put them in. If your accountant charges twice what we have assumed for an 1120-S, the break-even profit moves by thousands of dollars and the answer this page gives you can reverse.
The salary does not move when the profit moves, and that is deliberate.
Reasonable compensation follows the WORK, not the takings. If you doubled your profit tomorrow without changing what you do all day, the salary the IRS expects would not automatically double. That is why dragging the profit slider on this page leaves the salary box alone, and it is also why any rule of thumb that expresses the salary as a fraction of profit is answering a question the IRS did not ask.
If your reasonable salary is as large as your profit, there is nothing to shelter and the election is pure cost.
The distribution is what escapes payroll tax, and the distribution is what is left after the salary. A one-person business whose profit is roughly what the work is worth has no distribution to speak of, so it has nothing for the S-corp to save, and it still has to pay for the payroll service and the return. The calculator will show that as a loss, and the loss is the honest answer rather than a bug.
Federal only, 2026 only, and at high income we are conservative rather than optimistic.
No state income tax, no city tax, no state franchise tax except the one you type in yourself. And there is a 0.9% Additional Medicare Tax charged on wages and on self-employment income, which a distribution also escapes. Its threshold depends on how you file: $200,000 single or head of household, $250,000 married filing jointly, $125,000 married filing separately. It is not indexed and has not moved since 2013. We do not model it, so wherever your salary is below your threshold and your profit above it, the real saving is slightly larger than what we show.
The usual '14.13% of your distribution' sum has no wage base in it, and above $199,783 of profit that is the biggest thing wrong with it.
This page exists to correct that sum, and for a while it corrected only half of it. Two things make it too high. The salary penalty, 1.17%, which bites at every profit. And the wage base, which bites only above $199,783 of profit and bites harder: social security stops at $184,500 of net earnings, and the usual sum keeps charging it, so it overstates by a further 11.45% of every dollar of profit above that. The calculator was always right, because it caps social security where the statute does. The prose was half right, and half right in the direction that flatters the election.
Frequently asked questions
Would an S-corp actually save me money?
It depends on two numbers: how much profit you make, and what your work is genuinely worth as a salary. The gap between them is your distribution, and a distribution escapes payroll tax while profit and wages do not. On this page's starting numbers, $120,000 of profit and a $68,000 salary, the payroll tax saving is $6,551 a year and the S-corp costs $2,700 a year to run, so you are $3,851 ahead. Drop the profit to $92,742 and you are exactly level. Below that, an S-corp costs you money. Put your own numbers in, and be honest about the salary, because that is the box the IRS cares about.
How much does an S-corp save on taxes?
If your profit is below $199,783: roughly 14.13% of your distribution, minus 1.17% of your salary, minus what the corporation costs to run. The first term is the self-employment tax you stop paying: 15.3% charged on 92.35% of profit works out at 14.13% of it. The second term is the part almost every article omits. Payroll tax on a wage is charged on the whole wage, with no 92.35% step, so the salary you pay yourself is taxed slightly harder than that money would have been as sole-proprietor profit, and you hand back 1.17% of it. The third term is payroll service, the 1120-S return, the books and any state fee. On our defaults the promised saving is $7,347, the real payroll tax saving is $6,551, and what you keep after the running costs is $3,851. ABOVE $199,783 OF PROFIT THAT FORMULA BREAKS, and it breaks in the flattering direction, so do not carry it upward: your social security tax has already stopped at the wage base, and 14.13% of the distribution goes on charging it. Subtract a further 11.45% of every dollar of profit above $199,783. At $400,000 of profit and a $68,000 salary the formula above would tell you $43,414 and the calculator will tell you $20,487, because the calculator caps social security and the formula does not. Use the calculator. That is what it is for.
What salary do I have to pay myself in an S-corp?
A reasonable one, and we are not going to tell you what that is, because it depends on your job and we do not know it. The IRS publishes a list of factors rather than a number: training and experience, duties and responsibilities, time and effort devoted to the business, dividend history, payments to non-shareholder employees, timing and manner of paying bonuses to key people, what comparable businesses pay for similar services, compensation agreements, and the use of a formula to determine compensation. In its own words, the key to establishing reasonable compensation is determining what the shareholder-employee did for the S corporation by looking to the source of the S corporation's gross receipts. If you see a rule of thumb telling you to pay yourself sixty percent and distribute the other forty, understand what it is: somebody's habit, not a safe harbour, and it appears in none of the IRS's guidance. The salary that gets you into trouble is the one chosen to make the tax small.
Is the 60/40 rule real?
No, and it is worth being precise about what that means. There is no such figure in the IRS's published guidance: no percentage, no ratio, no safe harbour, no formula. What the IRS publishes is a list of nine factors, and your profit is not one of them. A ratio cannot be the answer, because reasonable compensation is about what the work is worth, and the work does not become more valuable because the business had a good year. If somebody has told you that a fixed split is safe, ask them where it is written down.
At what profit does an S-corp start to make sense?
There is no universal number, which is exactly why this page is a calculator and not an article. It is the profit at which the payroll tax you save covers both the payroll tax on your salary and the cost of running the corporation. That depends on your salary, which is about your job, and on your costs, which are about your accountant and your state. On our defaults it lands at $92,742 of net profit. If your accountant is dearer, or your state charges a franchise fee, it lands higher. If your reasonable salary is low relative to the profit, it lands lower. Work out yours rather than trusting anyone's round number.
What happens above the social security wage base?
The saving collapses to the Medicare rate. Social security tax stops once earnings reach $184,500 for 2026, which for a sole proprietor is a profit of about $199,783 after the 92.35% step. Beyond that, each extra dollar of profit carries only the 2.9% Medicare tax, which is 2.68% after that same step, so each extra dollar of distribution an S-corp shelters saves 2.68% rather than 14.13%. The election is still worth having if your salary is well below the base, because you are sheltering the dollars underneath it. But the idea that the saving keeps growing at 14.13% forever is not true, and the calculator above switches over on its own. This is also where every 'S-corp saves you 14.13% of your distribution' article quietly falls apart, because that sum has no wage base in it at all: it keeps charging you a social security tax you stopped paying at $184,500, so above $199,783 of profit it overstates by a further 11.45% of every dollar.
What does an S-corp actually cost to run?
A payroll service, because you are now an employee and there must be a real payroll with real withholding and a W-2. A separate tax return on Form 1120-S, which the corporation files in March, before your personal return is due, and which produces a Schedule K-1 that then goes on your 1040. Bookkeeping somebody will stand behind. Unemployment tax on your own wages, which a sole proprietor's drawings never attract. And in some states an annual fee whatever you earn. We default those to $600, $1,200 and $900, with the state fee at zero, and every one of those is OURS: nobody publishes what these things cost, so we made up plausible numbers and put them in boxes for you to overwrite. Get real quotes. They decide the answer.
Does this include my income tax?
No, and that is deliberate. This page compares payroll tax with payroll tax, which is the comparison the S-corp election actually changes, and it stops there. It does not model income tax, the 20% QBI deduction, or any state's rules. An S-corp moves QBI in both directions and can claw back part of what you see here. Half of self-employment tax is deductible and so is the employer half of payroll tax, so a lower payroll tax bill quietly raises your income tax a little. All of that is real, all of it is complicated, and a wrong number would be worse than an honest gap. For the whole federal picture as a sole proprietor, use our self-employment tax calculator. For the S-corp version of it, take this page's numbers to an accountant.
