Should You Elect S-Corp Status?
As a sole proprietor, your entire net profit (times 92.35%) is subject to the 15.3% self-employment tax โ 12.4% Social Security up to the 2026 wage base of $184,500 (rising to $192,300 in 2027, per the SSA) plus 2.9% Medicare with no cap. Elect S-corp status and only the "reasonable salary" you pay yourself is subject to payroll tax โ the rest can be taken as distributions, which skip Social Security and Medicare tax. That's the core appeal for profitable freelancers.
The Catch: Extra Costs and Rules
The savings aren't free. An S-corp means running payroll, filing a separate Form 1120-S, and paying a salary the IRS considers genuinely "reasonable" โ set it too low and you risk an audit. Add bookkeeping fees, and the math only works once profit is high enough. This calculator compares sole-proprietor tax against S-corp payroll tax plus extra costs to find your breakeven point.
Frequently Asked Questions
Sole proprietors pay SE tax on all profit; S-corp owners only pay payroll tax on their salary, with the rest taken as distributions tax-free of FICA.
No โ payroll, a separate tax return, and accounting costs eat into the savings. It only pays off once profit is high enough.
What a similar role would earn in the open market. Setting it artificially low is a common IRS audit trigger.
โป Estimates only. Actual savings depend on your state, industry, and specific facts โ consult a tax professional before electing S-corp status.