The split that saves you money
For 2026, a sole proprietor generally calculates self-employment tax on 92.35% of net earnings. Social Security applies up to the annual wage base, Medicare has no wage cap, and Additional Medicare Tax can apply above fixed statutory thresholds.
In the site's 2026 screening illustration at $120,000 of profit, the model uses $42,000 of W-2 salary and estimates $6,963 of annual difference after $1,500 of administration cost. That is not a guaranteed saving. The salary assumption, QBI limits, state tax, FUTA, SUTA, and the owner's other facts can change or reverse the result.
Why you cannot pay yourself zero salary
The IRS requires S Corp owner-employees to pay themselves a reasonable salary for the work they perform before taking distributions. Pay yourself too little and the IRS can reclassify distributions as wages, assess back payroll taxes, and add penalties and interest.
The key word is reasonable. It is not a fixed number or a percentage. It is based on what an unrelated employer would pay someone to do the same work in your industry and geography. That is why documentation matters, and that is what the reasonable compensation memo is for.
The cash-flow trap in year one
New S Corp owners often underestimate the cash-flow adjustment in year one. You go from paying quarterly estimated taxes on your full profit to running payroll every month (with employer-side FICA due each pay period) plus quarterly estimated taxes on the remaining distribution income.
The timing changes whether or not the final comparison produces a saving. Set up a separate payroll-tax holding account from day one and fund it with each pay run. Confirm the annual result using the actual salary, state rules, QBI inputs, and recurring costs rather than relying on monthly cash flow.
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