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) reports all business income on Schedule C. That income is subject to self-employment tax at 15.3% (12.4% Social Security plus 2.9% Medicare) on top of regular income tax. There is no way around it. Every dollar of net profit gets hit.

An S-Corp is not a different legal entity. It is a tax election you make on your existing LLC. Once elected, the business pays you a W-2 salary (subject to FICA, the employer and employee side) and the remaining profit comes out as a distribution that is not subject to self-employment tax at all. You still owe income tax on the distribution, but the 15.3% payroll layer disappears.

The math at three income levels

At $75,000 net profit: As a sole prop, SE tax is approximately $10,597. As an S-Corp with a $50,000 reasonable salary, FICA drops to $7,650. Annual savings: $2,947. After payroll costs of $600 per year, net savings: $2,347.

At $150,000 net profit: As a sole prop, SE tax is approximately $21,194. As an S-Corp with a $75,000 reasonable salary, FICA drops to $11,475. Annual savings: $9,719. After payroll costs, net savings: $9,119.

At $250,000 net profit: As a sole prop, SE tax is approximately $28,854 (Social Security caps at $176,100, Medicare continues). As an S-Corp with a $100,000 reasonable salary, FICA drops to $15,300. Annual savings: $13,554.

Who should NOT elect S-Corp

If your net profit is below $50,000, the payroll compliance costs ($600 to $1,200 per year for payroll processing plus the 1120-S return) eat most of the savings. The break-even is roughly $55,000 to $65,000 depending on your state.

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.