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Tax rates verified against official government sources for the 2025-2026 tax year
Published by ConvertCrunch Editorial Team | Our Methodology
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One of the most common questions for small business owners and self-employed professionals is whether to operate as a single-member LLC (taxed as a sole proprietorship) or to elect S-Corp status. The answer depends almost entirely on how much you earn and how much you can reasonably pay yourself as a salary.
As a sole proprietor or single-member LLC, you pay self-employment (SE) tax on 92.35% of your net business profit. The SE tax rate is 15.3% โ composed of 12.4% for Social Security (on earnings up to $184,500 in 2026) and 2.9% for Medicare (uncapped). If your earnings exceed $200,000, an additional 0.9% Medicare surtax applies. You can deduct half of your SE tax when calculating your adjusted gross income.
With an S-Corp election, you split your business income into two buckets: a โreasonable salaryโ (subject to FICA payroll taxes) and remaining distributions (not subject to FICA). The employer pays 7.65% and the employee pays 7.65% on the salary portion. By keeping your salary at a defensible but moderate level, the distributions escape the 15.3% payroll tax entirely.
S-Corps require payroll processing, a separate corporate tax return (Form 1120-S), and often additional bookkeeping. These costs typically run $1,500โ$5,000+ per year depending on complexity. If the payroll tax savings do not exceed these administrative costs, the S-Corp election is not worth it.
If your net business profit is consistently above $40,000โ$50,000, modeling both scenarios with this calculator can reveal significant annual savings. Always consult a CPA to determine the right reasonable salary and to ensure compliance with IRS guidelines.