Compare what your business pays in federal taxes as a sole proprietor or single-member LLC (Schedule C) and as an S corporation that pays you a reasonable salary: self-employment and payroll taxes, income tax, the QBI deduction, and the extra cost of running an S corp.
Tax Year 2026A lower salary saves more payroll tax but is harder to defend as reasonable, lowers your Social Security earnings record, and can reduce the QBI deduction at higher incomes. Pick the salary that fits the work you do, not the one that saves the most.
Self-employment tax is figured on Schedule SE: net earnings = profit × 92.35%; 12.4% Social Security tax on net earnings up to the 2026 limit of $184,500 (reduced by your own W-2 wages), plus 2.9% Medicare tax on all net earnings. Half of the SE tax is deducted on Schedule 1, and that deduction also reduces qualified business income (QBI). No SE tax is due if net earnings are under $400.
You are an employee of your own corporation. On your salary the corporation pays 7.65% employer FICA (6.2% Social Security up to $184,500 + 1.45% Medicare), federal unemployment tax (0.6% of the first $7,000 after the state credit) and state unemployment tax, and withholds 7.65% from you. The corporation deducts your salary, its payroll taxes, the payroll service, the Form 1120-S preparation fee and state fees; the remaining profit passes through to you on Schedule K-1 and is subject to income tax but not to SE tax. Your salary does not count as QBI, but it does count as W-2 wages for the QBI wage limit.
Both scenarios use the 2026 tax rate schedules and standard deduction from Rev. Proc. 2025-32, as amended by the One Big Beautiful Bill Act. The QBI deduction is 20% of QBI, limited to 20% of taxable income before the deduction. Above the threshold ($201,750; $403,500 married filing jointly; $201,775 married filing separately) the deduction is phased in over $75,000 ($150,000 joint) to the W-2 wage limit (50% of W-2 wages; the 2.5% of property basis alternative is not modeled), and for a specified service business it phases out entirely. From 2026, a taxpayer with at least $1,000 of QBI from an active business gets a deduction of at least $400. The 0.9% Additional Medicare Tax applies to wages and SE earnings above $200,000 ($250,000 joint; $125,000 separate).
| 2026 figure | Single | Married joint | Head of household | Married separate |
|---|---|---|---|---|
| Standard deduction | $16,100 | $32,200 | $24,150 | $16,100 |
| QBI threshold / end of phase-in | $201,750 / $276,750 | $403,500 / $553,500 | $201,750 / $276,750 | $201,775 / $276,775 |
| Additional Medicare Tax threshold | $200,000 | $250,000 | $200,000 | $125,000 |
| Social Security wage base | $184,500 per person | |||
An S corporation shareholder who works in the business must be paid reasonable compensation before taking non-wage distributions. The IRS looks at factors such as training and experience, duties and responsibilities, time devoted to the business, what comparable businesses pay for similar services, compensation agreements, and dividend history. Distributions that should have been wages can be reclassified, with back payroll taxes, penalties and interest.
State and local income taxes (some states tax S corporations or do not recognize the election, for example New York City), net capital gains and qualified dividends, credits, the 2.5% UBIA part of the QBI wage limit, health insurance for a more-than-2% shareholder (deductible either way), retirement plan contributions (a Solo 401(k) employer contribution is 25% of salary in an S corp vs. 20% of net SE earnings as a sole proprietor), passive and rental income (not subject to SE tax in either case), basis and loss limits, and the senior and other OBBBA deductions.
Related tools: Self-Employment Tax Calculator · QBI Deduction Calculator
This calculator gives an estimate for planning purposes only, not a final calculation. It compares federal taxes under the simplified assumptions described above and does not cover state taxes or every situation. Whether a salary is reasonable depends on your facts. Tax savings are only one part of choosing a business structure; for legal questions such as liability protection, consult an attorney. Calculator created October 9, 2026 — figures reflect IRS and SSA guidance for tax year 2026 current as of that date.
