Updated August 14, 2026. Quick answer: on the assumptions below the election starts paying at about $104,858 of profit, and moving the payroll bill or the marginal rate slides that anywhere from $84,597 to $118,833. The reason it is not lower is the part most calculators leave out: the salary you pay yourself is not qualified business income, so it costs you a fifth of itself in lost deduction. At $120,000 of profit the payroll-tax saving is $7,775 and the actual saving is $1,951. Run your own numbers below.
What the election actually changes
Nothing about the business changes. What changes is the label on the money. As a sole proprietor or a default single-member LLC, the whole profit is self-employment income: 12.4% to the retirement side up to $184,500 and 2.9% to Medicare with no ceiling, both applied to 92.35% of the profit rather than all of it.
“In addition to other taxes, there shall be imposed for each taxable year, on the self-employment income of every individual, a tax equal to 12.4 percent of the amount of the self-employment income for such taxable year.”
26 U.S.C. § 1401(a)
Elect S-corporation treatment and the profit splits in two. The part paid to you as wages carries the same total payroll tax, because you are both halves of it — 6.20% plus 6.20% on the retirement side and 1.45% twice on Medicare. The part left over is a distribution, and it carries none.
The three costs nobody nets out
One: the payroll machinery. A W-2 needs a payroll service, quarterly filings and a corporate return. The table below runs it at $1,200, $2,500 and $4,000 a year, which is the range a one-person S corporation lands in.
Two, and this is the one that moves the answer: the qualified business income deduction shrinks. The statute excludes your own reasonable compensation from qualified business income.
“reasonable compensation paid to the taxpayer by any qualified trade or business of the taxpayer for services rendered with respect to the trade or business”
26 U.S.C. § 199A(c)(4)(A)
So a dollar moved out of profit and into salary is a dollar that stops earning the 20% deduction. At a 22% marginal rate that is 4.4% of every salary dollar handed back in income tax. In the worked example it comes to $2,469 — against a payroll saving of $7,775.
Three: some states tax the entity anyway. California charges 1.5% of the profit with a floor of $800; the calculator has it as an option and the California page works it through.
The worked example, in full
$120,000 of profit, a $60,000 salary, $2,500 of payroll cost, a 22% marginal rate, no state entity tax.
| No election | With the election | |
|---|---|---|
| Payroll or self-employment tax | $16,955 | $9,180 |
| Payroll service and extra prep | $0 | $2,500 |
| Qualified business income | $111,522 | $55,410 |
| Total federal cost | $36,583 | $34,632 |
The payroll-tax line moves $7,775. The bottom line moves $1,951. The payroll bill and the lost deduction between them eat 75% of the number the sales pitch quotes. Strip the qualified business income deduction out of both sides — the position of a specified service business whose taxable income is over the threshold — and the same example would save $4,420 instead.
Where the break-even lands
Profit at which the election starts to pay, at a $60,000 salary.
| Marginal rate | $1,200 payroll cost | $2,500 | $4,000 |
|---|---|---|---|
| 12% | $84,597 | $94,261 | $105,412 |
| 22% | $94,770 | $104,858 | $116,498 |
| 24% | $96,912 | $107,090 | $118,833 |
The salary assumption matters as much as either. Hold everything else and defend a $40,000 salary instead and the break-even falls to $76,372; defend $80,000 and it rises to $133,344. That is not a lever you get to pull freely — the salary has to be what the work is worth, which is its own question.
When the answer is no, and it often is
- Profit below the break-even. Below about $104,858 on these assumptions the election is a fee you pay for paperwork.
- Profit that is mostly your own labour. If the receipts come from your hands, the defensible salary is most of the profit and there is little left to distribute.
- A year you want the Social Security record. Wages build the benefit and distributions do not; that trade-off has its own page.
- You will not actually run payroll. An election with no W-2 is the worst of the three structures.
If you are still deciding whether to form anything at all, that question comes first, and how you pay yourself from an LLC is the step before this one.
What this does not model, and will not guess
- Income tax is a single marginal rate, not a bracket walk. The calculator applies the rate you type to the whole taxable amount. Real returns straddle brackets, and no standard deduction, credit or other income is modelled.
- The qualified business income deduction is applied at the full 20%, which assumes taxable income below the threshold amount, a business that is not a specified service trade above it, and enough taxable income to absorb the deduction. Above the threshold the wage limit changes the answer in the other direction.
- No state income tax on you personally is modelled — only the California entity-level tax, and only as an option.
- No retirement plan is modelled. A solo 401(k) reads wages and profit differently under each structure, which can outweigh everything on this page: the S-corp version and the sole-proprietor version.
- Health insurance, state unemployment tax and workers compensation are ignored. All three exist and all three lean against the election.
- The additional 0.9% Medicare tax is applied at the single-filer threshold of $200,000. A joint filer crosses it later, a separate filer sooner, and no wages a spouse earns are counted.
- $184,500 is the 2026 wage base. It moves every January and the figures on this page move with it.
Sources
Every figure on this page is computed from the text quoted below. Each row links the document it was read from, as read on August 14, 2026.
| What it establishes | Source |
|---|---|
| Self-employment income carries a 12.4% OASDI tax. | 26 U.S.C. § 1401(a) |
| Self-employment income carries a further 2.9% hospital-insurance tax with no ceiling. | 26 U.S.C. § 1401(b)(1) |
| An extra 0.9% applies above $200,000 of self-employment income for a single filer. | 26 U.S.C. § 1401(b)(2)(A) |
| Net earnings are reduced by half of the combined 1401(a)+(b) rates before the tax is applied — the 92.35% step. | 26 U.S.C. § 1402(a)(12) |
| The employee half of OASDI is 6.2% of wages. | 26 U.S.C. § 3101(a) |
| The employee half of hospital insurance is 1.45% of wages. | 26 U.S.C. § 3101(b)(1) |
| The employer half of OASDI is another 6.2% of the same wages — and an owner-employee pays both halves. | 26 U.S.C. § 3111(a) |
| The employer half of hospital insurance is a further 1.45% of wages. | 26 U.S.C. § 3111(b) |
| The 2026 OASDI contribution and benefit base is $184,500. | SSA, Cost-of-Living Increase and Other Determinations for 2026, 90 FR 49047 (Nov. 3, 2025) |
| The qualified-business-income deduction is capped at 20 percent of taxable income less net capital gain. | 26 U.S.C. § 199A(a) |
| Reasonable compensation paid to the owner is NOT qualified business income — so every dollar moved from profit to salary is a dollar removed from the 20% deduction. | 26 U.S.C. § 199A(c)(4)(A) |
| The wage-limit machinery switches on above a threshold amount that starts at $157,500 and is inflation-indexed. | 26 U.S.C. § 199A(e)(2)(A) |
| The section 164(f) self-employment-tax deduction is attributable to the trade or business for QBI purposes, so it reduces the sole proprietor’s qualified business income. | 26 C.F.R. § 1.199A-3(b)(1)(vi) |
| California taxes an S corporation’s net income at 1.5 percent. | Cal. Rev. and Tax. Code § 23802(b)(1) |
| The minimum franchise tax is $800 a year. | Cal. Rev. and Tax. Code § 23153(d)(1) |
General consumer information, not financial, tax or legal advice. Federal and state rules are as published by the cited source on 2026-08-14 and change; your own facts govern, and an S-corporation election is a decision to take with a tax professional who has seen your books.
State rules, state by state
The federal math above is the same everywhere. What a state charges on top of it, or whether it requires its own election, is not. Fifteen states genuinely change the answer:
- Alabama: Alabama requires its own S-corp filing, Form 20S, on top of the federal one.
- Arkansas: Arkansas requires no separate S-corp election, but its franchise tax scales with capital stock in a way an LLC’s flat $150 never does.
- Georgia: Georgia can terminate its recognition of the election, and separately taxes S-corps under a net worth tax an LLC is exempt from.
- Idaho: Idaho charges every S-corp a mandatory $20 minimum tax a partnership-taxed LLC never owes.
- Louisiana: Louisiana just changed a real trap: before 2026, an S-corp could default to C-corp taxation without a separate filing.
- Massachusetts: Massachusetts charges every S-corp a $456 minimum excise tax an LLC never owes.
- Mississippi: Mississippi’s franchise tax reaches an S-corp because it remains a corporation, at least $25 a year.
- New Hampshire: New Hampshire’s Business Enterprise Tax statute names S-corps specifically when it defines the taxable dividends base.
- New Jersey: New Jersey dropped the extra election step in 2022, but still charges S-corps a $375 to $1,500 minimum tax outside the LLC fee schedule.
- New Mexico: New Mexico’s $50 franchise tax applies to an S-corp as a corporation; an LLC never sees it.
- New York: New York requires its own election, Form CT-6, and skipping it means full C-corp taxation.
- North Carolina: North Carolina’s franchise tax reaches an S-corp at a $200 minimum that an LLC never owes.
- Oregon: Oregon charges every S-corp a mandatory $150 minimum excise tax an LLC never owes.
- South Carolina: South Carolina’s corporate License Fee applies to an S-corp; an LLC not taxed as a corporation is named exempt.
- Washington, D.C.: The District taxes an S-corp exactly like a C-corp, with no pass-through relief at all.