S-Corp vs Sole Proprietor: How Much Can You Save?
By Angel Quintana, EA · June 27, 2026
If you run a profitable business as a sole proprietor or single-member LLC, there is a good chance you are paying more self-employment tax than you need to. Electing S-Corp status is one of the most common ways business owners legally cut that bill. Here is how it works, and how to know if it is right for you.
The problem with being a sole proprietor
As a sole proprietor, every dollar of net profit is subject to self-employment tax: 15.3% (12.4% for Social Security up to the annual wage base, plus 2.9% for Medicare). That is on top of regular income tax. On $150,000 of profit, the self-employment tax alone runs over $20,000.
How an S-Corp lowers the bill
When your business is taxed as an S-Corp, you split your income into two parts:
- A reasonable salary, which is subject to payroll tax (the same Social Security and Medicare rates).
- Distributions, the remaining profit, which are not subject to Social Security and Medicare tax.
Only the salary gets hit with payroll tax. The distributions do not. That difference is the savings.
You can estimate it in about thirty seconds with our S-Corp Tax Savings Calculator. For example, on $150,000 of profit with a $70,000 reasonable salary, the self-employment tax savings is roughly $10,000 per year.
What “reasonable salary” actually means
This is the part people get wrong. The IRS requires S-Corp owners to pay themselves a reasonable salary for the work they actually do before taking distributions. Set it too low to dodge payroll tax and you invite an audit and penalties.
A defensible salary is based on your role, your industry, your hours, and what you would pay someone else to do your job. Getting this number right, and documenting it, is exactly the kind of thing an Enrolled Agent helps with.
When the switch is worth it
An S-Corp is not free. It adds payroll filings, a separate business return (Form 1120-S), and bookkeeping. As a rule of thumb, the math tends to favor an S-Corp once your net profit is consistently above the salary you would reasonably pay yourself, often somewhere north of $60,000 to $80,000 in profit. Below that, the added cost can outweigh the savings.
The only way to know for sure is to run your specific numbers, including income tax, the qualified business income deduction, and the real cost of running payroll.
Run your numbers
Start with the free S-Corp Tax Savings Calculator to see a ballpark. Then, if the savings look meaningful, entity structuring with Angel Quintana, EA covers the whole move: choosing the right structure, setting a defensible salary, filing the election, and keeping it compliant.
This article is general information, not tax advice. Your situation is unique. Book a strategy session for a recommendation tailored to your business.