S Corp vs Sole Proprietor: The Real Tax Difference in 2026

The core difference is one tax: self-employment tax

A sole proprietor (or a single-member LLC that has not elected otherwise) generally reports business income on Schedule C. Self-employment tax is generally calculated on 92.35% of net earnings. The 12.4% Social Security portion is limited by the annual wage base, while the 2.9% Medicare portion has no wage cap. Additional Medicare Tax can apply above fixed statutory thresholds.

An S Corporation pays a working shareholder reasonable W-2 compensation subject to employment tax before non-wage distributions. Qualified pass-through income may avoid employment tax, but it remains subject to income tax and the Section 199A rules. The comparison must also include payroll filings, FUTA, SUTA, state entity taxes, return preparation, and reasonable-compensation evidence.

The math at three income levels

The 2026 illustrations below use a single filer in Texas, no other wages, an other-service-business setting, active participation, no non-owner W-2 wages, no qualified-property basis, and $1,500 of annual payroll and Form 1120-S administration cost. The salary is a screening assumption, not an IRS-approved compensation conclusion.

At $75,000 of net profit, the model uses $35,000 of W-2 salary and estimates $3,037 of annual difference in favor of the S Corporation after the administration-cost assumption. Different facts can change or reverse the result.

At $120,000 of net profit, the model uses $42,000 of W-2 salary and estimates $6,963 of annual difference in favor of the S Corporation after the administration-cost assumption. Different facts can change or reverse the result.

At $250,000 of net profit, the model uses $87,500 of W-2 salary and estimates $11,824 of annual difference in favor of the S Corporation after the administration-cost assumption. Different facts can change or reverse the result.

Who should NOT elect S Corp

If the modeled payroll-tax difference does not exceed payroll, return, unemployment-tax, and state costs under your facts, the election may add cost rather than save money. There is no universal profit cutoff.

If your income is highly variable year to year, the fixed salary commitment can create cash-flow problems in down months. You still owe payroll taxes on the salary even if the business has a slow quarter.

If you plan to sell the business within 12 months, the election adds complexity to the transaction without enough time to recoup the setup costs.

How to make the switch

You do not dissolve your LLC and form a new entity. You file IRS Form 2553 (Election by a Small Business Corporation) and your existing LLC begins being taxed as an S Corp. Same EIN, same bank accounts, same contracts. The only thing that changes is how the IRS taxes the entity.

The deadline is 2 months and 15 days after the start of the tax year (March 15 for calendar-year filers). Miss it and you can still file retroactively under Rev. Proc. 2013-30 for up to 3 years and 75 days. We handle the entire process for a flat fee starting at $495.