01/26/2026
📊 ⚖️ An S-Corp doesn't change how much you earn. It changes how that income is classified — and classification determines which taxes apply.
As a sole proprietor, all net profit is subject to self-employment tax: 12.4% for Social Security (up to $184,500 in 2026) plus 2.9% for Medicare on everything. With an S-Corp, you split your earnings between a W-2 salary and distributions. Only the salary portion triggers payroll taxes. Distributions skip them entirely.
But there's a tradeoff most people overlook. The Qualified Business Income (QBI) deduction — which can reduce taxable income by up to 20% — applies only to the distribution portion. Pay yourself too high a salary, and you shrink the pool that qualifies for the deduction. Pay yourself too little, and the IRS may reclassify distributions as wages anyway.
The optimal split isn't always obvious. It depends on profit level, the wage base, and how salary decisions ripple into other parts of the tax code.
