How S-Corps Lower Your Self-Employment Tax (With Real Numbers)
Everybody says an S-Corp “saves you on taxes.” Almost nobody shows you the actual math. So here it is: real numbers, worked all the way through, for contractors.
This article is for HVAC, plumbing, electrical, concrete, and other trade contractors who want to SEE where the self-employment tax savings come from before they decide anything. We’ll cover how the tax works, run three examples at different profit levels, explain the wage base “limit” (yes, there’s a ceiling), and cover the payroll deduction that sole proprietors flat-out don’t get.
Fair warning: there’s arithmetic. But it’s the arithmetic that decides whether you keep $10,000 or hand it to the IRS, so stick with me.
Key Takeaways
- Self-employment tax is 15.3%, which is 12.4% Social Security plus 2.9% Medicare, on your business profit.
- As a sole prop, ALL your profit gets hit. As an S-Corp, only your salary gets hit. Distributions are exempt.
- The Social Security part (12.4%) stops at the wage base, $184,500 for 2026. Above that, only the 2.9% Medicare keeps going. This is the “limit” people vaguely remember.
- The sweet spot is between about $70K profit and the wage base. That’s where the S-Corp savings are biggest.
- Your salary AND the employer payroll taxes on it are business write-offs. A sole prop writing the IRS a check for income tax gets no deduction for it. That’s a real, separate edge.
How Self-Employment Tax Actually Works
When you work a W-2 job for someone else, you and your employer split the 15.3%. You each pay 7.65%. When you work for yourself, you’re both the employer AND the employee, so you pay the whole 15.3%. That’s self-employment tax.
Per the IRS, that 15.3% breaks into two pieces:
- 12.4% Social Security, but ONLY up to a yearly cap called the wage base.
- 2.9% Medicare, no cap, applies to every dollar.
For 2026, the Social Security wage base is $184,500 (per the Social Security Administration). So the 12.4% Social Security tax applies to your first $184,500 of earnings and then STOPS. The 2.9% Medicare keeps going forever. (And if you’re a high earner, there’s an extra 0.9% Additional Medicare tax above $200,000 single or $250,000 married filing jointly, per IRS Topic 560.)
As a sole proprietor or plain LLC, that whole machine runs on your ENTIRE net profit.
The S-Corp move: split your profit into a salary (which gets the 15.3% treatment) and a distribution (which gets NONE of it). The distribution is where the savings live.
(One quick note: self-employment tax is calculated on 92.35% of your net profit, not 100%. The examples below bake that in so the numbers are realistic.)
Example 1: Electrical Contractor, $90,000 Net Profit
Just over the threshold where an S-Corp starts making sense.
| Sole Prop / Plain LLC | S-Corp | |
|---|---|---|
| Net profit | $90,000 | $90,000 |
| Reasonable salary | n/a | $55,000 |
| Self-employment / payroll tax | ~$12,717 (15.3% on profit) | ~$8,415 (15.3% on salary only) |
| Tax on the rest | included above | $0 on the ~$35K distribution |
Gross savings: about $4,300 a year. Knock off about $2,500 for payroll and the separate S-Corp return, and you’re netting roughly $1,800. Real, but modest, which is exactly why $90K is near the floor, not the jackpot. (More on that threshold in The $70K Net Profit Rule.)
Example 2: HVAC Company, $200,000 Net Profit
Now we’re in the sweet spot.
| Sole Prop / Plain LLC | S-Corp | |
|---|---|---|
| Net profit | $200,000 | $200,000 |
| Reasonable salary | n/a | $110,000 |
| Self-employment / payroll tax | ~$28,234 | ~$16,830 |
| Tax on distribution | included above | $0 on the ~$90K distribution |
Gross savings: about $11,400 a year. After the roughly $2,500 in added costs, you’re keeping about $8,900, every year. That’s a new work truck every few years, just from filing a form and running payroll correctly.
Example 3: Concrete Contractor, $350,000 Net Profit
Higher profit, but watch what happens to the savings.
| Sole Prop / Plain LLC | S-Corp | |
|---|---|---|
| Net profit | $350,000 | $350,000 |
| Reasonable salary | n/a | $150,000 |
| Self-employment / payroll tax | ~$33,361 | ~$22,950 |
| Tax on distribution | included above | $0 on the ~$200K distribution |
Gross savings: about $10,400 a year. Notice something weird? The $350K contractor saves about the SAME as the $200K contractor. Actually a touch less. That’s not a mistake. That’s the wage base at work.
The Wage Base “Limit”: Why Savings Don’t Grow Forever
Here’s the part almost nobody explains, and it’s the “limit” you might’ve half-remembered.
The 12.4% Social Security tax only applies up to the wage base, $184,500 in 2026. Once your earnings pass that, the Social Security portion is DONE. Only the 2.9% Medicare keeps running.
What that means for the S-Corp math:
- Below the wage base, every distribution dollar you shield saves you the full 15.3%. Big wins.
- Above the wage base, the sole-prop side has already maxed out its Social Security tax too, so the only thing your S-Corp is still saving on the distribution is the 2.9% Medicare (plus maybe 0.9% at very high income).
So the biggest bang happens between roughly $70,000 in profit and the $184,500 wage base. Past that, you still save (the Medicare portion never caps) but the savings flatten out instead of climbing. That’s why our $350K concrete guy didn’t save dramatically more than our $200K HVAC guy: his reasonable salary is higher (so more of HIS money runs through payroll), and the Social Security ceiling caps both sides.
This is also why “just pay yourself as little as possible” is bad advice. It’s not legal (see reasonable compensation), and above the wage base it barely moves the needle anyway.
The Deduction Sole Proprietors Don’t Get
Now the bonus almost nobody mentions.
When you’re a sole prop and you write the IRS a check for your income tax, that check is NOT a write-off. You don’t get to deduct income tax you paid. (You do get to deduct one-half of your self-employment tax, but that’s it.)
When you’re an S-Corp and you run your salary through payroll, two things become deductible business expenses to your company:
- The salary itself. Every dollar of W-2 wages your S-Corp pays you lowers the company’s taxable profit.
- The employer’s half of the payroll taxes (7.65%) on that salary. Also a business deduction.
Those deductions reduce the profit that flows through to your personal return on the K-1. So paying yourself through payroll isn’t just moving money around. Part of it is actively lowering your taxable business income in a way a sole prop’s tax check never does. Same dollars leaving your account, completely different tax treatment.
(One honest caveat for the high earners: paying yourself a W-2 salary slightly reduces your Qualified Business Income deduction, because wages aren’t QBI. It’s usually a small offset against much bigger self-employment savings, but it’s a real moving part, and it’s the kind of thing your tax planner should be modeling, not ignoring.)
A Word on Where These Numbers Come From
Every figure above is an illustration built on real 2026 tax rates. Your actual savings depend on your true net profit and, this is the big one, the reasonable salary you set. Set it wrong and the whole calculation changes (and the IRS gets interested). We cover exactly how to land on the right salary in How to Pay Yourself From Your S-Corp, and the big-picture on the whole election in S-Corp for Contractors: The Complete Guide. If you need help electing S-Corp for your business, see our guide on who can help you elect s-corp.
Frequently Asked Questions
How much does an S-Corp save on self-employment tax?
For most contractors in the sweet spot (roughly $70K profit up to the $184,500 wage base), gross savings run about $4,000 to $12,000 a year, minus a couple thousand in added costs. The exact number depends on your profit and your reasonable salary.
What is the Social Security wage base for 2026?
$184,500. The 12.4% Social Security portion of self-employment/payroll tax applies only up to that amount. The 2.9% Medicare portion has no cap.
Why don’t my S-Corp savings keep growing as I make more?
Because the Social Security tax stops at the wage base. Above it, you’re only saving the 2.9% Medicare on distributions, so the savings flatten instead of scaling up. The biggest savings are between about $70K and $184,500 in profit.
Why don’t my S-Corp savings keep growing as I make more?
Yes. The salary you pay yourself and the employer’s share of the payroll taxes (7.65%) are both deductible business expenses that lower your S-Corp’s taxable profit. A sole proprietor writing a check for income tax gets no such deduction.
The Bottom Line
The S-Corp savings are real, they’re specific, and they max out in a range most profitable contractors sit right in the middle of. But the whole thing hinges on setting the right salary and having books clean enough to trust the numbers.
Want us to run YOUR actual math, your profit, your trade, your reasonable salary? Book a call at levelaccountingfirm.com. No guessing, just your numbers.
