LLC vs. S-Corp: The Tax Math by Income Level (with Worked Examples)

#Why we wrote this article

Just so you know — most “S-corp tax savings calculator” articles online use a single oversimplified formula and skip the parts that actually change the answer for real owners. They ignore the Social Security wage base ceiling, they double-count the income-tax effect of payroll deductions, they forget that compliance costs vary with state, and they almost never show their work.

We work with S-corp owners every single day. The math below reflects the way we actually model the election in our discovery calls, with the same inputs we use in a real client analysis. Look — if you’re sitting on the fence about converting, this article should let you eyeball your own situation in about ten minutes.

#The mechanism, in one paragraph

A default LLC (single-member taxed as a sole prop, multi-member taxed as a partnership) pays self-employment tax on 100% of net business income at 15.3% (12.4% Social Security up to the wage base, 2.9% Medicare unlimited, plus 0.9% additional Medicare on wages above $200K single / $250K MFJ). An S-corp splits net income into W-2 wages (payroll-tax-bearing, same effective rate) and distributions (no SE tax, no FICA). The savings equal (net business income − reasonable comp) × payroll tax rate on that gap, minus the compliance cost of running payroll and filing an 1120-S.

That is the part everyone models. It is also only half the story, and the half that gets left out is what makes the real curve so strange.

Here is the missing half. Your QBI deduction (§199A, the 20% pass-through deduction) is calculated on qualified business income — and W-2 wages are not qualified business income. So every dollar you shift from distribution into salary saves payroll tax and simultaneously shrinks the base your 20% deduction is computed on. Below the §199A threshold those two forces fight each other, and the payroll saving only wins by a margin. Above the threshold the relationship inverts completely: the deduction becomes capped at 50% of the W-2 wages your business pays, so a sole proprietor paying no wages loses it almost entirely, and paying yourself a salary is the only thing that keeps it.

That single interaction is why the numbers below dip where you would expect them to climb, and jump where you would expect them to flatten.

#The constants we’re using for 2026

Variable	2026 value
Social Security wage base	$184,500 (up from $176,100 in 2025)
SS rate (employee + employer)	12.4% combined (6.2% each side)
Medicare rate (employee + employer)	2.9% combined (1.45% each side)
Additional Medicare	0.9% employee only, on wages/SE income above $200K single / $250K MFJ
SE tax effective rate	15.3% on the first $184,500 of SE income; 2.9% above (plus 0.9% high-earner)
SE tax deduction	Half of SE tax deductible above the line on Form 1040 Schedule 1
Standard deduction (MFJ)	$32,200
Federal income tax brackets (MFJ)	10% / 12% to $100,800 / 22% to $211,400 / 24% to $403,550 / 32% / 35% / 37%
§199A threshold (MFJ)	$403,500, phasing to $553,500
§199A minimum deduction	$400, new for 2026, if you have at least $1,000 of QBI
Compliance cost (typical)	$1,800–$3,600/yr (Gusto payroll + 1120-S prep + state UI)

Every figure above is from a primary source: the Social Security wage base from the SSA, the brackets and standard deduction from the IRS 2026 inflation adjustments, and the §199A thresholds from Rev. Proc. 2025-32 §4.26.

Texas (where most ETS clients sit) has no state income tax, so the comparisons below ignore state-level differences. If you’re in California, New York, or another high-tax state, the federal math holds but state franchise-tax minimums shrink the net savings by $400–$1,000/yr.

#Income level 1 — $60,000 net business income

LLC default treatment:

• SE tax base = $60,000 × 92.35% = $55,410
• SE tax = $55,410 × 15.3% = $8,478
• Half deducted from AGI = $4,239 → AGI $55,761
• Taxable before QBI = $55,761 − $32,200 = $23,561
• QBI deduction = $4,712 (capped at 20% of taxable income, not 20% of QBI)
• Federal income tax on $18,849 = $1,885
• Total federal tax = $10,363

S-corp treatment (reasonable comp $40,000, distribution $20,000):

• Payroll tax on $40K W-2 = $6,120 (half employee, half employer)
• Payroll tax on the distribution = $0
• Corporation deducts $40K wages + $3,060 employer FICA, leaving $16,940 of K-1
• AGI = $56,940. Taxable before QBI = $24,740. QBI deduction = $3,388
• Federal income tax on $21,352 = $2,135
• Total federal tax = $8,255
• Compliance cost ~$2,000

Annual savings: $2,107 before compliance cost. Net savings: ~$107/yr.

That is a rounding error, not a strategy. And notice why: the payroll-tax saving is a real $2,358, but the S-corp’s QBI deduction is $1,324 smaller than the sole prop’s, because $40,000 of what used to be qualified business income is now wages. The structure gives back more than half of what it saves.

The comp assumption is doing the work here. At $60,000 of net income the owner’s labor essentially is the business, so a defensible salary is most of it — we use $40,000. If you instead assume a $30,000 salary, the same model spits out $1,732 of net savings and the election looks worth doing. That number is not wrong arithmetic; it is an indefensible salary, and it is exactly the assumption that makes online calculators promise savings that evaporate under examination.

We typically recommend staying on Schedule C until net income clears $75K consistently.

#Income level 2 — $100,000 net business income

LLC default treatment:

• SE tax base = $100,000 × 92.35% = $92,350
• SE tax = $92,350 × 15.3% = $14,130
• Half deducted = $7,065 → AGI $92,935
• Taxable before QBI = $60,735. QBI deduction = $12,147
• Federal income tax on $48,588 = $5,335
• Total federal tax = $19,465

S-corp treatment (reasonable comp $55,000, distribution $45,000):

• Payroll tax on $55K W-2 = $8,415
• K-1 of $40,792 (after $4,208 employer FICA), W-2 of $55,000, AGI $95,792
• Taxable before QBI = $63,592. QBI deduction = $8,158
• Federal income tax on $55,434 = $6,156
• Total federal tax = $14,571
• Compliance cost ~$2,000

Annual savings: $4,893 before compliance cost. Net savings: ~$2,893/yr.

This is where the election starts genuinely paying. The payroll saving is $5,715; the shrinking QBI base gives back about $820 of it. Real money, and it repeats every year — but note it is roughly half what a naive “15.3% × the distribution” calculation would tell you, because that calculation ignores QBI entirely.

#Income level 3 — $150,000 net business income

LLC default treatment:

• SE tax base = $150,000 × 92.35% = $138,525
• SE tax = $138,525 × 15.3% = $21,194
• Half deducted = $10,597 → AGI $139,403
• Taxable before QBI = $107,203. QBI deduction = $21,441
• Federal income tax on $85,762 = $9,795
• Total federal tax = $30,990

S-corp treatment (reasonable comp $70,000, distribution $80,000):

• Payroll tax on $70K W-2 = $10,710
• K-1 of $74,645 (after $5,355 employer FICA), W-2 of $70,000, AGI $144,645
• Taxable before QBI = $112,445. QBI deduction = $14,929
• Federal income tax on $97,516 = $11,206
• Total federal tax = $21,916
• Compliance cost ~$2,200

Annual savings: $9,074 before compliance cost. Net savings: ~$6,874/yr.

This is the best point on the whole curve, and most solo agencies and established contractors land right here. The payroll saving is large ($10,484), the QBI give-back is still modest, and you are nowhere near the §199A threshold where the rules change character. The election pays for itself in the first quarter every year.

If you are a 1099 medical contractor, read the SSTB note further down before you use this number — at this income level your answer is the same, but it stops being the same above roughly $400K.

#Income level 4 — $250,000 net business income

This is where the Social Security wage base ceiling starts to matter — and where the savings curve does something most articles never mention. It goes down.

LLC default treatment:

• SS portion = $184,500 × 12.4% = $22,878 (capped)
• Medicare portion = ($250,000 × 92.35%) × 2.9% = $6,695
• Additional Medicare = $0 (SE base of $230,875 is under the $250K MFJ threshold)
• Total SE tax = $29,573
• Half deducted = $14,787 → AGI $235,213
• Taxable before QBI = $203,013. QBI deduction = $40,603
• Federal income tax on $162,410 = $25,154
• Total federal tax = $54,728

S-corp treatment (reasonable comp $115,000, distribution $135,000):

• Payroll tax on $115K W-2 = $17,595 (below the cap, so full 15.3%)
• K-1 of $126,202 (after $8,798 employer FICA), W-2 of $115,000, AGI $241,202
• Taxable before QBI = $209,002. QBI deduction = $25,240
• Federal income tax on $183,762 = $29,852
• Total federal tax = $47,447
• Compliance cost ~$2,400

Annual savings: $7,281 before compliance cost. Net savings: ~$4,881/yr.

Read those two QBI lines again, because this is the part that surprises people. The sole proprietor gets a $40,603 QBI deduction. The S-corp owner gets $25,240. The S-corp is $15,363 worse off on that single line, and at a 22% marginal rate that hands back about $3,380 of tax.

Why? QBI is business income, and wages are not business income. The moment $115,000 of profit becomes salary, it leaves the QBI base. The sole prop’s deduction is computed on all $235,213; the S-corp’s only on the $126,202 K-1.

So the payroll-tax saving here is a healthy $11,978 — but the QBI give-back eats nearly a third of it. Net result: you save less at $250K than you did at $150K. Anyone quoting you a bigger number at this income level is running the payroll-tax half of the calculation and ignoring the other half.

#Income level 5 — $500,000 net business income

At $500K net you cross into the §199A phase-in range ($403,500 to $553,500 for MFJ), where the QBI rules change character entirely. Note also that a $180,000 salary now sits below the $184,500 wage base, so the full 15.3% still applies to all of it.

LLC default treatment:

• SS portion = $184,500 × 12.4% = $22,878 (capped)
• Medicare portion = $461,750 × 2.9% = $13,391
• Additional Medicare = ($461,750 − $250,000) × 0.9% = $1,906
• Total SE tax = $38,175
• Half deducted = $18,135 (the additional 0.9% is not deductible) → AGI $481,865
• Taxable before QBI = $449,665 — inside the phase-in range, and with $0 of W-2 wages the deduction is being squeezed toward the wage limit
• QBI deduction = $66,712 (down from an unrestricted $96,373)
• Federal income tax on $382,953 = $77,105
• Total federal tax = $115,279

S-corp treatment (reasonable comp $180,000, distribution $320,000):

• Payroll tax on $180K W-2 = $22,320 (SS, still under the cap) + $5,220 (Medicare) = $27,540
• No additional Medicare: W-2 of $180,000 is below the $250K MFJ threshold
• K-1 of $306,230 (after $13,770 employer FICA), AGI $486,230
• Taxable before QBI = $454,030. QBI deduction = $61,246 — 50% of the $180,000 in wages is $90,000, comfortably above 20% of the K-1, so the wage limitation never binds
• Federal income tax on $392,784 = $79,464
• Total federal tax = $107,004
• Compliance cost ~$3,000

Annual savings: $8,275 before compliance cost. Net savings: ~$5,275/yr.

Still the dip. The payroll saving is $10,635, but the sole prop’s QBI deduction ($66,712) remains larger than the S-corp’s ($61,246) even after being phased down, so the income-tax line moves against you again.

One benefit the table cannot show you. Distributions to an actively participating S-corp shareholder are generally not subject to the 3.8% net investment income tax, because §1411 reaches only passive income. A sole proprietor’s earnings are already outside NIIT too, so this is not a difference between the two structures at this income level — but it becomes a real advantage over holding the same business inside a passive structure, and it is worth knowing before someone sells you the S-corp on NIIT grounds alone.

#Income level 6 — $1,000,000 net business income

At $1M the payroll-tax difference is almost irrelevant. Something far larger takes over, and it is the single strongest argument for the S-corp anywhere on this page.

LLC default treatment:

• SS portion = $184,500 × 12.4% = $22,878 (capped)
• Medicare = ($1,000,000 × 92.35%) × 2.9% = $26,782
• Additional Medicare = ($923,500 − $250,000) × 0.9% = $6,062
• Total SE tax = $55,721
• Half SS+Medicare deducted = $24,830 → AGI $975,170
• Taxable before QBI = $942,970 — far above the $553,500 top of the phase-in range
• QBI deduction = $400. Not a typo. See below.
• Federal income tax on $942,570 = $270,915
• Total federal tax = $326,636

S-corp treatment (reasonable comp $280,000, distribution $720,000):

• Payroll tax on $280K W-2 = $22,878 (SS to cap) + $8,120 (Medicare) + $270 (additional Medicare on the $30K above the $250K MFJ threshold) = $31,268
• K-1 of $704,501 (after $15,499 employer FICA), W-2 of $280,000, AGI $984,501
• Taxable before QBI = $952,301. QBI deduction = $140,000 — 50% of the $280,000 in W-2 wages
• Federal income tax on $812,301 = $222,716
• Total federal tax = $253,984
• Compliance cost ~$3,600

Annual savings: $72,653 before compliance cost. Net savings: ~$69,053/yr.

Here is what just happened. Above the §199A phase-in range, the QBI deduction is capped at 50% of the W-2 wages your business pays. A sole proprietor pays themselves no W-2 wages — by definition, you cannot employ yourself. So the cap is 50% of zero. Their entire pass-through deduction is wiped out, and all that survives is the $400 minimum deduction that OBBBA added for 2026.

The S-corp pays $280,000 in W-2 wages, so its cap is $140,000 — and it keeps every dollar.

That one line is worth roughly $52,000 of the $72,653. The payroll tax saving, the thing every S-corp calculator on the internet leads with, accounts for less than a third of the total at this income level.

At $1M the S-corp is not a payroll-tax play. It is the only structure that lets a high-income pass-through business keep its 20% deduction at all.

#Side-by-side summary table

Non-SSTB business (contractor, agency, trades, e-commerce, most operating companies):

Net business income	Reasonable comp	LLC total federal tax	S-corp total federal tax	Annual savings (gross)	Compliance cost	Net annual savings
$60,000	$40,000	$10,363	$8,255	$2,107	$2,000	~$107
$100,000	$55,000	$19,464	$14,571	$4,893	$2,000	~$2,893
$150,000	$70,000	$30,990	$21,916	$9,074	$2,200	~$6,874
$250,000	$115,000	$54,728	$47,447	$7,281	$2,400	~$4,881
$500,000	$180,000	$115,279	$107,004	$8,275	$3,000	~$5,275
$1,000,000	$280,000	$326,636	$253,984	$72,653	$3,600	~$69,053

Federal only. MFJ, standard deduction, no other household income, no capital gains, no retirement contributions, no UBIA. Your actual savings depend on state income tax, retirement contributions, health insurance treatment, and a dozen other variables.

#What the table doesn’t capture

The S-corp election produces several second-order benefits that show up in the model but never in the headline tax savings number:

Retirement contribution capacity. A Solo 401(k) employer profit-sharing contribution is 25% of W-2 wages. At $180K reasonable comp, that’s $45K of additional tax-deferred space — worth roughly $14,400 in federal tax savings at the 32% bracket. See the Solo 401(k) stacking article.

Accountable plan reimbursements. $5K–$15K/yr of tax-free reimbursement for home office, vehicle, phone, internet. See the accountable plan article.

§162(l) health insurance deduction. Above-the-line deduction for premiums, no payroll tax. See the >2% shareholder health insurance article.

NIIT avoidance on actively-managed distributions. 3.8% on investment income above $250K MFJ; actively-managed S-corp distributions are exempt.

PTET election (state SALT workaround). In 36 states (not Texas) the S-corp can elect to pay state income tax at the entity level, deducted federally as an ordinary business expense — bypassing the $40K SALT cap. See the PTET election article.

Layering these on top, the total tax efficiency improvement for a $300K-net owner is typically $20K–$35K/yr, not just the headline $14K–$15K SE tax savings.

#Common questions

Why does the savings curve dip at $250K instead of climbing? Two forces pull against each other. Above the $184,500 Social Security wage base, each marginal distribution dollar saves about 3.8 cents instead of 15.3 cents, because SS tax has stopped. At the same time, every dollar you move into W-2 salary leaves your QBI base, shrinking the 20% §199A deduction. In the $250K–$500K band those two effects together outrun the payroll saving’s growth, so net savings actually fall before rising again at higher income.

Does the savings work the same for spouses or partnerships? For a single-member LLC switching to S-corp, yes. For a multi-member LLC, the math gets more complex because the partnership already allocates SE income via guaranteed payments + distributive shares. We model multi-owner conversions separately during discovery.

What about state income tax effects? Texas, Florida, Nevada, Tennessee, and a handful of other states have no personal income tax, so the federal-only math holds. In California, the S-corp pays a 1.5% franchise tax on net income with an $800 minimum. New York City has an unincorporated business tax that doesn’t apply to S-corps but the city S-corp tax (8.85%) applies instead. Net state effect is usually $400–$2,000/yr negative — not large enough to flip the decision, but enough to model.

How accurate are these numbers for my situation? The directional math is solid. The exact dollar figures depend on filing status, other income sources, deduction levels, and credits. We always run client-specific numbers during the discovery call rather than relying on generic tables. Free advice either way.

What if my reasonable comp is genuinely 80% or 90% of net? Then the S-corp savings are smaller because most of the income is wages anyway. This is common for high-skilled service providers who do the work themselves (physicians, attorneys, consultants). The election still typically saves $5K–$12K/yr at $250K+ net, but the cleaner argument shifts to retirement plan capacity, NIIT avoidance, and other structural benefits.

Does the QBI deduction change the math? Yes, and it is usually the largest single factor. The 2026 threshold is $201,750 single / $403,500 MFJ, phasing to $276,750 / $553,500 (Rev. Proc. 2025-32). (1) For a non-SSTB above the range, the deduction is capped at 50% of W-2 wages — so a sole proprietor paying no wages loses it entirely, and paying yourself a salary is what preserves it. (2) For an SSTB (medicine, law, consulting, financial services), it phases to zero above the range no matter what you pay yourself. (3) Below the threshold it runs the other way: shifting profit into salary shrinks your QBI base and costs you deduction. We model QBI explicitly in every S-corp analysis, because the direction of the effect reverses depending on where you sit.

What’s the cleanest way to test the math for my own numbers? Pull your last full-year P&L. Take net income. Subtract a realistic reasonable comp number for your role — realistic, not the lowest number you think you can defend. Multiply the remainder by 15.3% if your salary is under $184,500, or 2.9% if it is over. Subtract $2,500 of compliance cost.

That gives you the payroll-tax half. Treat it as a ceiling, not a floor, if your taxable income is under $403,500 — the QBI give-back will take a bite out of it, as it does at every level in the table above. If you are well over $553,500 and not an SSTB, the reverse is true and the real number can be several times larger, because the deduction you would lose as a sole proprietor is worth more than the payroll tax. That crossover is exactly the point where a generic estimate stops being useful.

When does the election become time-sensitive? Late March (the standard filing deadline). After that, you’re filing a late election under Rev. Proc. 2013-30 — still works, still gets approved almost universally, but the paperwork is more involved. See the late election article.

How do I know if my reasonable comp is defensible? Industry-specific wage benchmarks (BLS, RCReports, specialized surveys), documented in a written memo before the first paycheck runs. See the reasonable comp documentation article.

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If your net business income is north of $80K and you’re still on Schedule C or a partnership return, the math is almost certainly in your favor. We don’t do surprises — the Discovery call walks through your actual numbers and tells you straight whether the election will pay for itself. Free advice either way.