Somewhere on the internet right now, someone in a rented Lamborghini is telling freelancers that an S corp saves you “15.3% on everything.” It’s a great hook. It’s also wrong — or at least, wildly incomplete.
Here’s the honest version, because the honest version is the one that keeps you out of trouble.
How the savings actually work
As a sole proprietor, your entire business profit is hit with 15.3% self-employment tax (Social Security and Medicare). Elect S-corp status and you split your profit into two buckets: a salary you pay yourself (which still gets payroll tax) and distributions (which don’t). The tax you save is the payroll tax on everything you legitimately take as distribution instead of salary. That’s the real mechanism — not “15.3% on everything.”
The four things that shrink the number
- Overhead is real. Payroll service, a second tax return, state fees: figure $1,200–$3,000 a year, every year.
- The 20% QBI haircut. Paying yourself a salary shrinks your qualified business income deduction. That costs real money on the other side of the ledger.
- You lose a deduction sole props get. Half of self-employment tax is deductible — and most napkin math forgets it exists.
- Social Security caps out. Past $184,500 of wages in 2026, the Social Security portion stops. Above that line, the “15.3%” you think you’re saving is really 2.9%.
Which is why the answer depends on your number
Run the honest math at three income levels and you get three different answers:
- ~$60,000 profit — the S corp usually loses you about $2,000 a year once overhead and the QBI haircut are counted. Nobody selling formations mentions this.
- ~$150,000 profit — now it typically saves around $5,000 a year, every year.
- ~$400,000 profit — $7,000 to $22,000, depending on one detail about what kind of work you do.
The answer isn’t a vibe, and it isn’t a rule of thumb. It’s arithmetic — your arithmetic, with your profit, a defensible salary for your role, and your state’s costs.
That’s the entire reason we built a $7.99 kit that runs the honest calculation on your real numbers — and tells you plainly when the answer is “not yet.”
LLC or S-Corp? The Business Structure Decision Kit
Stop guessing with rules of thumb. Run your profit, your salary, your state through an honest calculator, a 2-minute decision tool, and a plain-English guide.
