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Guide · S corporations

How an S corporation saves tax, with a worked example.

The S corporation's main benefit is that profits paid as distributions avoid Social Security and Medicare tax. Here is how the math works, what it costs and when it is not worth it.

Forms & standards
IRC § 1362IRC § 1402Rev. Rul. 74-44IRC § 199AIRC § 3121Form 2553

Serving United States, Virginia, Washington, DC, Maryland.

What we handle

The math, step by step

As a sole proprietor or single-member LLC, all net profit is subject to self-employment tax of 15.3% up to the Social Security wage base and 2.9% above it. As an S corporation, only the owner's wages bear payroll tax; the remaining profit flows through as distributions without it.

Example: a consultant earns $150,000 of profit. As a sole proprietor, nearly all of it bears self-employment tax. As an S corporation paying a documented reasonable salary of $80,000, the other $70,000 avoids payroll tax, saving roughly $9,000 to $10,000 a year before costs. Payroll processing, an extra tax return, state fees and unemployment taxes can reduce that by a few thousand dollars, and a higher salary or the QBI deduction changes the result, so we model it for your facts.

Speak with an advisor
  • Step 1: profit checkIs profit well above a reasonable salary for your role?
  • Step 2: reasonable salaryMarket data for the work you do.
  • Step 3: costsPayroll, return preparation, state fees and unemployment taxes.
  • Step 4: QBI and state taxEffects on the 199A deduction and PTET.
  • Step 5: electionForm 2553 timing or late election relief.
  • Step 6: run it rightPayroll, accountable plan and basis tracking every year.

Where we help

Watch-outs

Risk

Salary too low

The IRS reclassifies distributions as wages when salary is unreasonable.

Risk

Non-pro-rata distributions

Unequal distributions can threaten the S election.

Cost

Payroll and filings

Extra compliance costs reduce the net savings.

Limit

Basis

Losses and tax-free distributions depend on shareholder basis.

Our approach

How the engagement runs.

Review

A senior advisor reviews your facts and documents.

Plan

Scope, fees and timeline in an engagement letter.

File

Returns, elections and forms prepared and reviewed.

Support

IRS contact and planning all year.

Questions

Frequently asked

If your question isn't here, call (703) 880-8412 and you'll reach a person.

Is the example typical?

It shows the mechanics. Your savings depend on profit, the salary your work supports, state taxes and costs.

Can I set my salary very low to save more?

No. Salary must be reasonable for the services you perform, and courts have reclassified distributions as wages.

Does an S corporation lower income tax too?

Not directly; the main saving is payroll tax. The QBI deduction and retirement plans can add income tax savings.

Where can I learn more?

See our S corporation tax planning and reasonable compensation pages.

Latest updates

IRS & federal tax

All IRS & federal tax updates
Nov 5, 2026IRS & federal tax

IRS releases 2027 inflation adjustments (Rev. Proc. 2026-35)

For 2027 the joint-return standard deduction rises to $33,200, the estate tax basic exclusion to $15,480,000, the annual gift exclusion to $20,000 and the Section 179 expensing limit to $2,640,000. Our advisors recommend revisiting year-end gifting and equipment purchase plans with these figures in mind.

Source: IRS (IR-2026-133)

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