LLC vs S-Corp: The Tax Math by Income Level

#Why we wrote this article

Just so you know. Most “S corp vs LLC” and “S-corp tax savings calculator” articles online use one oversimplified formula. They 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 by state. They almost never show their work.

We work with S-corp owners every single day. The math below is the same math we use in a real client analysis, with the same inputs. 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 pays SE tax on 92.35 percent of net earnings. A single-member LLC is taxed as a sole prop; a multi-member LLC is taxed as a partnership. The SE tax rate is 15.3 percent up to the wage base. That breaks down as 12.4% Social Security up to the wage base, plus 2.9% Medicare with no cap, plus 0.9% additional Medicare on wages above $200K single / $250K MFJ. An S-corp splits net income into two parts. W-2 wages carry payroll tax at the same effective rate. Distributions carry no SE tax and no FICA. The savings equal (net business income − reasonable comp) × payroll tax rate on that gap, minus the compliance cost. That compliance cost covers running payroll and filing an 1120-S.

That is the part everyone models. It is also only half the story. 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. At the same time, it shrinks the base your 20% deduction is computed on. Below the §199A threshold, those two forces fight each other. The payroll saving only wins by a margin. Above the threshold, the relationship flips. The deduction gets capped at 50% of the W-2 wages your business pays. A sole proprietor who pays no wages loses it almost entirely. Paying yourself a salary is the only thing that keeps it alive.

That single interaction is why the numbers below dip where you would expect them to climb. It is also why they jump where you would expect them to flatten.

#The constants we’re using for 2026

Every figure above comes from a primary source. The Social Security wage base comes from the SSA. The brackets and standard deduction come from the IRS 2026 inflation adjustments. The §199A thresholds come 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: at $60K the payroll tax saving is about $2,358. After the QBI and other tax effects you keep about $2,107. About $2,000 of that goes to compliance cost. So the QBI give-back costs only about $251 in tax, about 11 percent.

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. 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. Most solo agencies and established contractors land right here. The payroll saving is large, $10,484. The QBI give-back is still modest. 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. 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. 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) plus $8,120 (Medicare) plus $270 (additional Medicare on the $30K above the $250K MFJ threshold). Total = $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. This $1M result assumes the owner is the only worker. If you have employees, their wages already count toward your cap, and the S-corp gain at $1M is much smaller.

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 is about a third of the total and the QBI deduction is about two thirds.

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.

#S corp vs LLC: side-by-side summary table

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

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 $45,000 of room that defers tax. It lowers your taxable income now and the money is taxed when you take it out. 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. Active business income is outside NIIT under either structure, at this income level. So this is not a difference between an LLC and an S-corp for that reason alone.

PTET election (state SALT workaround). The 2026 SALT cap is $40,400 and shrinks to $10,000 for higher earners. In 36 states, not Texas, the S-corp can elect to pay state income tax at the entity level. That tax is then deducted federally as an ordinary business expense. A PTET election can avoid the SALT cap in states that offer one. See the PTET election article.

Layering these on top, second-order benefits can add value but vary a lot, and deferral is not the same as 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 shifted dollar saves about 2.9 cents. It saves 3.8 cents once income passes $250,000 for joint filers, 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? If your fair salary is 80 to 90 percent of profit, the S corp often saves little. It can even cost more in federal tax at $250K to $500K, because of the QBI deduction. Run your own numbers first.

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. A sole proprietor who pays 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 by 92.35 percent, apply 15.3 percent up to the wage base and 2.9 percent above it, then subtract your 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. The real number can be several times larger. 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? Mid-March (March 15, or the next business day). After that you can ask for late relief under Rev. Proc. 2013-30. You need a good reason and the IRS decides. See the late election article.

S corp vs LLC: which one saves more tax? It depends on your net business income, not on the entity name. An S corp is a tax election that an LLC can make. So the real question is whether to keep default LLC taxation or elect S corp status. In our 2026 model above (federal only, MFJ, non-SSTB), the S corp is a wash at $60K. It saves about $2,900 at $100K and about $6,900 at $150K. Below roughly $75K to $80K of steady net income, the default LLC usually wins once compliance cost is counted.

Is there an LLC vs S corp calculator I can trust? Use the six worked examples above as your calculator: find the income level closest to yours and read across the summary table. Most online calculators only multiply the distribution by 15.3%. That skips the QBI give-back below the §199A threshold and the QBI rescue far above it. So the number they show can be too high or far too low.

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 income is above $80K, the S corp often helps. Whether it does depends on your salary, your QBI deduction and your state. 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.