S-Corp vs Sole Proprietor Breakeven Calculator
At what profit does electing S-corporation status actually start to save money in 2026?
Below roughly $103,880 of business profit the election usually costs more than it saves, once running payroll and filing the extra Form 1120-S are paid for. On $120,000 of profit with a $69,770 salary it nets $2,078 a year after $1,563 of running costs — US federal only: state franchise taxes and minimum fees are not modelled, and in several states they erase the federal saving entirely.
United States federal tax · tax year 2026 · S corporation election
Electing S-corporation status splits your profit in two: a salary, which carries payroll tax, and a distribution, which does not. Against that saving stand real costs — running payroll, an extra tax return, and a section 199A deduction that shrinks because the salary is no longer qualified business income. Put in your own numbers and see the profit at which the election starts to pay for itself.
Your business
Health, law, accounting, consulting, athletics, financial services, performing arts and anything else whose main asset is the skill or reputation of its people. It only changes the answer at higher incomes.
Profit before you pay yourself anything, before employer payroll tax and before the extra cost of running a corporation. For a sole proprietor that is exactly Schedule C line 31, which is what makes the two sides comparable.
The box starts at $69,770 — the United States average annual wage across all occupations (May 2025, Bureau of Labor Statistics). That is a deliberately neutral placeholder, not a recommendation and not a share of your profit. Reasonable compensation is a legal requirement; there is a section on it below.
The default $1,563 is $660 of payroll for one employee for twelve months plus $903 for the Form 1120-S — published prices rather than a guess, but not a quote you have been given either. A sourced range is roughly $1,410 to $1,910. Add any state fee, unemployment insurance or bookkeeping you would not otherwise pay for.
What it costs each way
This page computes United States federal tax only. Several states tax an S corporation in its own right, and the charge can wipe out the federal saving completely. California taxes California source net income at 1.5% with an $800 minimum franchise tax due every year whether the business profits or not; Illinois charges a 1.5% personal property replacement tax on net income. Find out what your own state does before you file Form 2553, and put whatever you find into the cost box above.
Sources: California Franchise Tax Board, S corporations; Illinois Department of Revenue, Income Tax Rates. Both retrieved 25 August 2026.
Federal tax, side by side
| Line | Sole proprietor | S corporation | Difference |
|---|---|---|---|
| Self-employment tax / payroll tax, both halves | — | — | — |
| Federal income tax | — | — | — |
| Additional Medicare Tax (Form 8959) | — | — | — |
| Total federal tax | — | — | — |
| Section 199A deduction (a deduction, not a tax) | — | — | — |
| Payroll service and the extra return † | — | — | — |
| Net saving a year † | — | ||
The shape, across a range of profits
| Business profit | Sole proprietor | S corporation | Net saving † |
|---|
† The net saving and the breakeven both rest on the $1,563 running cost above, which is a default assembled from published prices rather than a quote you have been given — change it to your own. Neither figure includes any state or city tax, franchise tax, minimum fee or unemployment insurance.
Reasonable compensation: the number with no formula
The salary you typed is your assumption. It is not our recommendation and it is not a rule: there is no percentage in the statute, none in the regulations and none in IRS guidance. What the IRS does say is that S corporations must pay reasonable compensation to a shareholder-employee in return for services the employee provides to the corporation, before any non-wage distribution is made to that shareholder-employee.
It is also the point on which this arrangement is challenged. The instructions to Form 1120-S say distributions must be treated as wages to the extent they are reasonable compensation for services rendered, and the IRS states plainly that it has the authority to reclassify non-wage distributions as wages — which is what happened in Veterinary Surgical Consultants (117 T.C. 141), Joseph M. Grey Public Accountant (119 T.C. 121) and Joly (T.C. Memo. 1998-361). Set the number low and the saving on this page is what you are arguing about.
The factors the IRS names — not one of them a percentage of profit:
- Training and experience; duties and responsibilities.
- Time and effort actually devoted to the business.
- What comparable businesses pay for similar services.
- Dividend history, and what non-shareholder employees are paid.
- Compensation agreements, and the timing and manner of bonuses.
You will see a "60/40" or "50/50" split quoted online as though it were a safe harbour. It is a practitioner rule of thumb — it appears in no statute, no regulation and no IRS guidance — and this page neither uses it nor endorses it. The starting value in the salary box is a national average wage, deliberately unrelated to your profit, precisely so it cannot be mistaken for such a rule.
Quotations from IRS, "S corporation compensation and medical insurance issues", retrieved 25 August 2026.
This is a calculator, not tax advice. It computes United States federal tax before credits for tax year 2026 on the assumptions listed here. Whether to elect S-corporation status turns on facts this page never sees; have it checked by someone qualified to advise you.
- Quarterly estimated tax calculator — what to pay each quarter, and which safe-harbour test binds.
- Underpayment penalty calculator — what a missed or late instalment costs, day by day.
A web form can only answer the question you already knew to ask, and only for one year in one browser tab. The workbook carries the whole year in a file that is yours:
- Schedule AI in full — the annualised instalment method, for income that arrives unevenly. It is what stops a big fourth quarter being penalised as though it had been earned in January, and no web form does it.
- Your real Schedule C: 23 expense categories across the four Form 1040-ES periods, the mileage helper, the 50% meals limit and the home-office line — instead of one profit figure typed into a box.
- All three safe-harbour tests, the payment calendar, and a set-aside sheet that recomputes the entire engine at profit plus $1,000 so you can see what the next $1,000 actually costs you.
- A Sources sheet carrying every constant with its IRS or SSA document, its URL and the date it was read, plus 27 live reconciliations you can watch tick as you type.
Every constant used here — the brackets, the wage base, the section 199A thresholds, the safe-harbour percentages — is published as an open dataset, with the document each one was read from.
See the open dataset →How this page works it out
A sole proprietor pays self-employment tax on the whole profit: 92.35% of it counts as net earnings, then 12.4% social security up to the $184,500 wage base for 2026 and 2.9% Medicare with no ceiling, plus 0.9% more above the Form 8959 threshold. Half of the self-employment tax comes off adjusted gross income, and qualified business income is the profit less that half.
An S corporation pays its owner a salary instead. That salary carries FICA — 6.2% and 1.45% withheld from the employee and the same again from the employer, and the owner-employee economically pays both halves, so this page counts both. What is left after the salary, the employer's payroll tax and the cost of running the corporation is ordinary business income on the K-1: no FICA on it and no self-employment tax either. Income tax is then worked out on the wages and the K-1 together.
Every rate, bracket, threshold and rounding rule comes from the same verified 2026 model as our paid workbook — 30 constants, each carrying the IRS or SSA document it was read from and the date. The arithmetic that runs in your browser is extracted from this page and checked against that model, to the dollar, across every filing status, both sides of the social security wage base and the whole section 199A phase-in, before the page is allowed to ship. Nothing is stored: no account, no email, nothing leaves your browser.
What this page does not do
The comparison is deliberately narrow, so that both sides are the same shape. It assumes:
- United States federal tax only, tax year 2026 only, before credits. No state or city tax, no franchise tax, no minimum fee, no unemployment insurance.
- One owner, one business, no other employees. The wages used for the section 199A limit are the owner's salary and nothing else.
- No other household income and no spouse's wages, and the standard deduction rather than itemising.
- No self-employed health insurance deduction and no retirement contributions. Both change the answer, and a solo 401(k) can move it a long way.
- No qualified property, so the section 199A cap rests on wages alone. No basis, at-risk or passive-activity limits on a loss.
- Only the recurring annual cost of the corporation — not the one-off cost of forming it and filing Form 2553.
Questions people actually ask
Why does the payroll saving stall once profit passes $184,500?
Because that is the 2026 social security wage base. Below it, a dollar taken as a distribution rather than salary saves the whole 15.3%; above it social security has already stopped and only the 2.9% Medicare is left. The overall saving often keeps growing at high profits — but that is section 199A doing the work, not payroll tax, because a sole proprietor with no employees loses the deduction above the threshold while the corporation keeps a cap of half its wages. Change the profit and watch both effects in the table.
Does the salary have to be a particular percentage of the profit?
No. There is no percentage anywhere in the law. The IRS asks what comparable businesses pay for similar services, alongside your training, duties, hours and several other factors — a wage question, not a profit-split question. Any "60/40 rule" you have read about is a practitioner habit, not a safe harbour, and this page does not apply one.
Can I pay myself nothing and take it all as a distribution?
This calculator will not price that, and the reason is not squeamishness. The IRS says it can reclassify non-wage distributions as wages, and the courts have upheld it. If your salary is reclassified you owe the payroll tax anyway, with interest and possibly penalties, and you have paid for a payroll service and an extra return to gain nothing.
Why is the section 199A deduction smaller in the S-corp column?
Because reasonable compensation paid to a shareholder is not qualified business income at all — IRC 199A(c)(4)(A). The salary leaves QBI completely, whereas a sole proprietor loses only the deductible half of self-employment tax. On $120,000 of profit with a $69,770 salary that is a salary-sized hole in QBI, and 20% of it is deduction you no longer get. That clawback is why a naive "15.3% of your distribution" sum overstates the saving, sometimes badly.
What is the extra cost really?
The default is $1,563: $660 for a year of payroll for one employee on Gusto's published Simple plan, and $903 for the Form 1120-S, which is the national average in the National Society of Accountants' most recent Income and Fees survey. That survey's fee data was collected in 2019 and 2020, so treat it as a floor rather than a forecast. Your own quotes belong in that box, along with any state fee, unemployment insurance and bookkeeping you would not otherwise be paying for.
Is anything I type sent anywhere?
No. Everything is computed in your browser. There is no account, no email box, nothing saved on your device and nothing sent to us.
