Payroll tax on $380,000 of profit: $33,055 as a sole proprietor, $15,300 with a $100,000 salary

Self-employment tax on $380,000 of sole-proprietor profit is $33,055. If the same business is an S corporation paying its owner a $100,000 salary, Social Security and Medicare tax on that salary is $15,300. The difference is $17,755 a year, before what the election costs to run.

*Rates are the 2026 figures carried in the entity-and-structure-review tool, read from IRS Tax Topic 554 and Topic 751 on 22 September 2026. IRS Topic 554 was read again on 4 October 2026; the 2026 wage base is the tool's figure and was not re-read.*

The rates

- Self-employment tax: 12.4% Social Security plus 2.9% Medicare, 15.3% in all. It applies to 92.35% of net profit. - Social Security stops at the wage base: $184,500 in 2026. Medicare does not stop. - Wages in an S corporation: the same 15.3% (employer half and employee half together) on the whole salary, no 92.35% reduction, same $184,500 stop.

Sources: IRS Topic 554 for the self-employment rates and the 92.35%; IRS Topic 751 and the Social Security Administration for the wage base.

Brightline, as a sole proprietor

Brightline Heating & Air nets $380,000 before the owner is paid. This is the same illustrative HVAC company as in our owner-pay guide.

- Taxable: $380,000 × 92.35% = $350,930. - Social Security: $184,500 × 12.4% = $22,878. The base is used up, so the rest of the profit carries none. - Medicare: $350,930 × 2.9% = $10,176.97. - Total: $33,054.97, about $33,055.

Brightline, as an S corporation with a $100,000 salary

- Social Security: $100,000 × 12.4% = $12,400. - Medicare: $100,000 × 2.9% = $2,900. - Total: $15,300.

The other $280,000 is distributions. It carries no Social Security or Medicare tax. It is still income on the owner's personal return.

$33,055 − $15,300 = $17,755.

A smaller business

Take a one-person studio with $90,000 of profit and a $60,000 salary. Both figures are illustrations.

- Sole proprietor: $90,000 × 92.35% = $83,115. At 15.3%, $12,716.60. - S corporation: $60,000 × 15.3% = $9,180. - Difference: $3,536.60, about $3,537.

Brightline's gap is five times the studio's. The profit is 4.2 times larger, and the salary is only 1.7 times larger.

What the election costs

The saving is not the whole story. An S corporation files its own return and runs payroll for the owner. Suppose that costs $3,000 a year. That figure is an assumption; get your own from your accountant.

- Brightline: $17,755 − $3,000 = $14,755. - The studio at $2,500 of cost: $3,537 − $2,500 = $1,037.

At the studio's size the cost uses up most of the difference. A higher salary assumption would remove it.

The salary is the judgment

Every figure above moves with the salary. The IRS requires an S corporation to pay a corporate officer reasonable compensation for services rendered and lists factors it looks at: training and experience, duties, time devoted, what comparable businesses pay, and others. It does not give a number or a weighting. A $100,000 salary was chosen here because the owner-pay guide put the role at $92,000 elsewhere. That is an illustration, not a finding about any business.

What the arithmetic leaves out

State income tax and state treatment of S corporations. The 0.9% Additional Medicare Tax, which starts at $200,000 for a single filer and applies to wages or self-employment income above that line. The deduction for half of self-employment tax. The qualified business income deduction. State unemployment tax and FUTA on the salary. Whether the owner's health insurance, retirement plan or other choices change the picture.

Where the tool fits

We built a calculator that finds the profit level where the saving starts exceeding the cost, given a salary guess and a cost guess: unfoldcfo.com/tools/entity-and-structure-review. It shows a range, not a point, because the salary and the cost are guesses. It does not say whether an election is right for a business, and it does not model the items in the last section.

Sources. IRS Topic 554, Self-Employment Tax; IRS Topic 751, Social Security and Medicare Withholding Rates; IRS, S corporation compensation and medical insurance issues; Social Security Administration, Contribution and Benefit Base. Brightline and the studio are illustrations, not customers. General information, not tax advice; your CPA owns the judgment calls.