S-Corp vs LLC for Contractors: Self-Employment Tax Math at $100K to $500K

The About $14,130 Schedule SE Check on $100,000 of Net Profit (2026)

If you're running an HVAC, plumbing, or electrical business as a single-member LLC or sole proprietor and netting over $80,000 a year, an S-corp election may lower your combined self-employment and payroll tax. In the fictional examples below, the difference ranges from about $6,500 to $18,300 a year before administrative costs and before the income-tax and QBI effects. It can shrink or disappear when a defensible salary is higher or state rules are unfavorable.

A simple $15,300 estimate is 15.3% of $100,000, the figure many owners assume. The actual Schedule SE calculation applies the rate to 92.35% of net profit, so the 2026 figure on $100,000 is about $14,130. That is still a large check, but the precise number matters when you compare structures.

This isn't a loophole. It's a structural difference in how the IRS treats business income depending on your entity type. My work interviewing contractors and reviewing financial operations across HVAC, plumbing, electrical and mechanical informs the questions below. That experience is not a measured prevalence of tax errors or a promise of savings. A common owner question is whether they should probably look at an S-corp. The answer comes from running the math with your own salary, state and income level, not from a rule of thumb. The math narrows the decision, but it does not make it automatic.

Let me walk you through it.

The Core Difference: Self-Employment Tax

When you operate as a sole proprietor or single-member LLC, your net profit is self-employment income. You pay both the employee and employer shares of Social Security and Medicare, but Schedule SE applies the tax to 92.35% of net profit, not 100%. On that base, you pay 12.4% Social Security up to the wage base and 2.9% Medicare with no cap. The wage base is $184,500 for 2026 per the SSA wage base table; it was $176,100 for 2025. The 0.9% Additional Medicare Tax applies above $250,000 of combined wages and self-employment income for married filing jointly ($200,000 for single filers), not at $200,000 for a joint return.

On $200,000 in net profit as an LLC, the 2026 self-employment tax is about $28,234 before any income tax. The base is $200,000 x 92.35% = $184,700. Social Security is 12.4% x $184,500 = $22,878. Medicare is 2.9% x $184,700 = $5,356.

An S-Corp changes the structure. The owner receives W-2 salary for services. Remaining taxable business profit passes through on Schedule K-1 whether or not it is distributed; cash distributions are a separate transaction, generally subject to stock-basis rules rather than payroll taxes. The salary carries employee and employer FICA (15.3% combined below the wage base). The corporation's share is a business deduction that lowers the profit passed through to you. Distributions carry no payroll tax. The entire game is about sizing the salary appropriately.

The Math at Three Income Levels

Let me run the numbers. These are fictional scenarios with stated assumptions:

• 2026 Social Security wage base ($184,500).
• Married filing jointly, with no other wages for either spouse.
• The salary shown is an assumption, not a reasonable-compensation conclusion.

The scenarios compare self-employment tax with payroll tax only. Income tax is not modeled here because it depends on brackets, deductions and the QBI effect covered below. Annual S-corp administrative cost (payroll service, added return, extra bookkeeping) is an illustrative planning assumption of $3,000. Get your own quotes.

Scenario 1: $100,000 Net Profit

As LLC (SE Tax):

• Net profit: $100,000
• Schedule SE base (92.35%): $92,350
• SE tax (15.3% on $92,350, below the wage base): ~$14,130

As S-Corp (assumed salary: $50,000):

• Salary: $50,000 (payroll taxes: $7,650, half employer and half employee)
• The employer share ($3,825) is deducted by the S-corp, so K-1 profit is $46,175
• Distribution: up to $46,175 (no payroll taxes)
• Total FICA payroll tax: $7,650 (FUTA/SUTA on owner wages is excluded; verify state treatment separately)
• Payroll tax difference: ~$6,480/yr ($14,130 minus $7,650)
• After $3,000 illustrative admin cost: ~$3,480/yr

At $100K, the payroll tax difference is about $6,500 before costs and about $3,500 after the illustrative admin cost. If your real admin cost is closer to $4,000, or a defensible salary is higher than $50,000, the margin shrinks quickly.

Scenario 2: $200,000 Net Profit

As LLC:

• Schedule SE base: $200,000 x 92.35% = $184,700
• Social Security: 12.4% x $184,500 (2026 wage base) = $22,878
• Medicare: 2.9% x $184,700 = ~$5,356
• Additional Medicare: none (below $250,000 MFJ)
• Total SE tax: ~$28,234
• Effective SE tax rate on $200K: about 14.1%

As S-Corp (assumed salary: $85,000):

• Payroll taxes on $85K: $13,005 (employer share of $6,503 deducted by the S-corp)
• K-1 profit and maximum distribution: ~$108,498, zero payroll tax
• Total payroll tax: $13,005
• Payroll tax difference: ~$15,229/yr
• After $3,000 illustrative admin cost: ~$12,229/yr

At $200K net, the payroll tax difference is about $15,200 before costs. Setup cost (often quoted at $1,500-$3,000) and annual upkeep (often quoted at $2,000-$4,000) are illustrative planning ranges, not measured figures. At the high end of both in the first year, the net is about $8,200. The income-tax effects below can reduce this further.

Scenario 3: $500,000 Net Profit

As LLC:

• Schedule SE base: $500,000 x 92.35% = $461,750
• Social Security: 12.4% x $184,500 = $22,878
• Medicare: 2.9% x $461,750 = ~$13,391
• Additional Medicare: 0.9% x ($461,750 minus $250,000) = ~$1,906
• Total SE/Medicare tax: ~$38,175

As S-Corp (assumed salary: $130,000):

• Payroll taxes on $130K: $19,890 (below the $184,500 wage base, so full Social Security applies)
• K-1 profit and maximum distribution: ~$360,055 after the $9,945 employer share, no payroll taxes
• Total payroll tax: ~$19,890
• Payroll tax difference: ~$18,285/yr
• After $3,000 illustrative admin cost: ~$15,285/yr

At $500K, the difference flattens. Above the Social Security wage base, the LLC is only paying 2.9% Medicare plus 0.9% additional, not the full 15.3%. The salary assumption also drives the result. A $130,000 salary is 26% of profit, and whether it is defensible depends on the owner's duties, not the percentage. Counterexample: if the defensible salary is $184,500, payroll tax is about $28,229 and the difference falls to about $9,946 before costs.

The Reasonable Salary Requirement, and the IRS

The IRS knows this game. Their requirement is that S-Corp owners who work in the business must pay themselves a "reasonable compensation," a salary comparable to what you'd pay someone else to do your job. This is where the structure has teeth and where sloppy implementation creates risk.

Illustrative starting ranges for contractor owner salaries (unsourced planning placeholders, not market survey data):

Replace these placeholders with a role-based comparison for your own market before setting payroll. When the IRS concludes an owner-employee's salary is unreasonably low, it can reclassify distributions as wages and assess back payroll taxes, penalties and interest. Courts have upheld that treatment in reported cases. Ask your adviser which current cases match your facts rather than relying on a single profit-to-salary story.

The working method: there is no IRS percentage-of-profit rule. Build the salary from duties instead:

1. List what the owner actually does (field work, estimating, dispatch, sales, management).
2. Estimate the hours in each role.
3. Price each role from wage data for your area.
4. Document the result with a job description and the comparisons used.

Profit above that figure can reflect return on capital, crews and equipment rather than the owner's labor. The $500K scenario above shows why percentages mislead: $130,000 is 26% of profit and may or may not be defensible, depending on those duties. When in doubt, err higher on salary and rerun the math to confirm the election still pays after costs.

If the business has multiple owners, each owner-employee needs their own reasonable salary analysis. That complexity is manageable with the right accounting setup. It just can't be handled by a bookkeeper who also does your cousin's taxes.

The QBI Deduction Complication (Section 199A)

Here's where entity choice gets genuinely complicated: the 20% Qualified Business Income deduction under Section 199A.

The QBI deduction allows owners of pass-through businesses (sole proprietors, LLCs and S-corps alike) to deduct up to 20% of qualified business income. It is also capped at 20% of taxable income less net capital gain. Limits start only above a taxable-income threshold, measured before the QBI deduction itself. For 2026, per IRS Rev. Proc. 2025-32 in IRB 2025-45, the limits phase in over these ranges:

• Married filing jointly: $403,500 to $553,500.
• Married filing separately: $201,775 to $276,775.
• Most other filers: $201,750 to $276,750.

Within that range, a specified service trade or business (SSTB) has its deduction phased down, and above it the deduction is eliminated. Other businesses have the wage and property limit phased in across the range and fully applied above it.

Good news for most contractors: HVAC, plumbing, electrical, mechanical, and roofing work is generally not treated as an SSTB. Above the threshold, the wage and property limit applies instead of a full phase-out. Separate consulting or design service lines can raise their own SSTB questions, so confirm classification with your adviser.

How the wage and property limit works: above the threshold, the deduction for a non-SSTB business is limited to the greater of two amounts:

• 50% of W-2 wages, or
• 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property (UBIA).

That limit applies to LLCs and sole proprietors too. W-2 wages paid to your employees count, so a contractor with crews may not be constrained. An owner-only LLC with no W-2 wages and little qualified property can have a deduction of zero once it is above the range. The Form 8995-A instructions show the calculation.

Salary cuts both ways. An S-corp owner's salary is not QBI, and the employer payroll tax on it is a deduction, so the salary reduces QBI.

Fictional example below the threshold. This uses the $200K scenario and assumes the taxable-income cap does not bind.

• As an LLC, QBI is about $185,883 ($200,000 less the $14,117 deductible half of SE tax), for a deduction of about $37,177.
• As an S-corp with an $85,000 salary, QBI is about $108,498, for a deduction of about $21,700.
• The roughly $15,477 smaller deduction costs about $3,405 of income tax at an assumed 22% marginal rate. That offsets part of the $15,229 payroll tax difference.
• A second income-tax effect runs the same direction. The LLC deducts half of SE tax ($14,117), while the S-corp deducts only the $6,503 employer share. That makes the S-corp owner's income before QBI about $7,615 higher ($85,000 + $108,498 versus $200,000 - $14,117). At the assumed 22% marginal rate, that is about $1,675 more income tax, for a combined offset of about $5,080 in this example. After both effects, the difference is about $10,149 before admin cost, or about $7,149 after the illustrative $3,000. This is a simplified marginal-rate sensitivity, not a completed joint income-tax return.

Counterexample above the range. Take an owner-only business with $700,000 of profit, no other employees, no qualified property, and taxable income above $553,500.

• As an LLC, it gets no QBI deduction.
• As an S-corp paying a $184,500 salary, QBI is about $501,386 after the $14,114 employer share. Twenty percent of that is about $100,277, and the 50% wage limit allows about $92,250.

Your tax adviser needs to model salary, QBI and the payroll tax difference together. Anyone giving you the answer without running that model is guessing.

When Staying an LLC Is Actually the Right Call

I want to be direct about when the S-Corp election doesn't make sense, because the answer isn't always "elect S-Corp immediately."

Under $60,000-$80,000 in net profit. The administrative costs of running an S-Corp (payroll service, an additional tax return and extra bookkeeping) can consume the payroll tax difference. Illustrative planning ranges are $500-$2,000/yr for payroll and $800-$2,000/yr for the return, which add up to $1,300-$4,000. These are not measured figures, so get quotes.

Fictional example: at $60K net with an assumed $35,000 salary, SE tax is about $8,478 ($60,000 x 92.35% x 15.3%). Payroll tax is $5,355, a difference of about $3,123. After those costs, the result ranges from about $1,823 to a loss of about $877, before income-tax effects, including QBI. The math improves as profit rises above the salary a defensible role analysis supports, as the $100K and $200K examples show.

You're planning to raise outside capital. S-Corps cannot have more than 100 shareholders, cannot have nonresident alien shareholders, generally cannot have corporate or partnership shareholders, and cannot issue more than one class of stock. If you're positioning for institutional capital, even venture or PE down the road, expect a restructuring such as a C-Corp conversion or a reorganization the buyer specifies. Plan it with your adviser. An S-Corp can be a detour. Start as an LLC, plan the conversion carefully.

Specific state tax situations. California FTB describes a 1.5% S-corporation tax and an $800 minimum, with first-year and other specific minimum-tax exceptions. Federal payroll-tax savings do not resolve that state comparison. New York City does not recognize the S election and may apply its General Corporation Tax when nexus exists. Allocation, deductions and the applicable city calculation matter; it is not simply a federal saving copied onto every state return. Run your state-specific math before assuming the federal savings translate.

You're actively losing money. Negative current profit can eliminate the modeled SE-tax saving while payroll and compliance costs continue. That does not automatically permit zero owner wages if an owner performs substantial services and receives distributions or other payments. Profit history and the $80K modeling range are planning prompts, not election eligibility rules or wage safe harbors.

The Mechanics of Electing S-Corp

If you're already an LLC, you don't need to re-form the entity. You file Form 2553 with the IRS to elect S-Corp tax treatment on an existing LLC. The LLC structure remains intact. The S-Corp election is a tax classification, not a legal change.

The Form 2553 instructions generally allow an election during the preceding tax year or no more than two months and fifteen days after the beginning of the tax year it will take effect. March 15 is the ordinary January 1 calendar-year deadline, adjusted for weekends and holidays; "75 days from formation" is not a universal rule. New short years and eligible late-election relief have specific requirements.

Once elected, you'll need: a payroll service for W-2 processing, a separate business bank account (you should have this anyway), and a CPA who files Form 1120-S (the S-Corp return) in addition to your personal 1040. Most tax preparers who work with small businesses handle this. Costs depend on payroll, returns, ownership and state requirements. Use actual quotes rather than assuming the extra work costs only a few hundred dollars.

The annual administrative tasks:

• Run owner payroll on a regular schedule.
• Deposit federal payroll taxes on the IRS deposit schedule that applies to you.
• File the federal payroll returns that apply: usually Form 941 quarterly and Form 940 annually, with Form 944 an exception only when the IRS authorizes it.
• File W-2/W-3 by January 31, adjusted when the due date falls on a weekend or legal holiday.
• File Form 1120-S by March 15 for a calendar-year S-corp.

State payroll filings vary, so check your state.

What This Means for Your Business Value

If you're thinking about selling your contracting business in the next 5-10 years, entity structure matters beyond the annual tax savings.

When PE firms evaluate contractor financials, they look at EBITDA. Owner W-2 compensation shows up as an expense, which reduces reported EBITDA. Distributions don't. The add-back analysis, where PE firms add back excess owner compensation, is more straightforward when the compensation structure is defensible and documented. A well-structured S-Corp with documented reasonable salary and consistent distributions tells a cleaner story than an LLC with erratic owner draws.

It's also worth noting that fractional CFO support starts making sense at the same income levels where the S-Corp election is compelling. The two often coincide: once you're doing $3M+ in revenue and netting $150K+, you've outgrown DIY bookkeeping and DIY tax planning simultaneously.

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The Bottom Line

The decision framework: if you're a contractor netting over $80,000/year in a state without punitive S-Corp treatment, the election often makes financial sense, but run the numbers. In the fictional examples on this page, the payroll tax difference runs from about $6,500 to $18,300 a year before admin costs. Income-tax effects, including QBI, and a higher defensible salary can reduce it materially. The setup is manageable, and a documented, role-based salary is your best defense if compensation is questioned.

Common mistakes:

• Waiting without running the numbers. Each year above roughly $80K without modeling it may be a year of avoidable payroll tax.
• Setting salary too low. A $25K salary on $500K of profit is hard to defend against a role-based analysis.
• Ignoring the QBI interaction, which can cut either way depending on your income level and wages.

Run the numbers for your situation. If you haven't benchmarked your overall financial health recently, start there. The entity structure optimization only matters if the underlying business is generating the margins to make it worthwhile.

Q: When exactly should I elect S-Corp for my contracting business? A: A common planning range to start modeling is $80,000-$100,000 in net profit. The real test is profit compared with the salary a role-based analysis supports. Below that range, administrative costs (an illustrative $1,300-$4,000/yr; get quotes) can outweigh the payroll tax difference. Above it, the fictional examples on this page show differences of about $3,500 to $15,300 per year after an illustrative $3,000 admin cost, before income-tax effects, including QBI. The best time to make the change is at the start of a tax year, so plan ahead. If you're already profitable above $100K as an LLC, you should revisit this immediately.

Q: How do I know if my S-Corp salary is reasonable? A: The IRS looks at what you'd pay a third party to do the work you actually perform. Break your duties into roles (field technician, estimator, dispatcher, manager), estimate the hours in each, and price them from wage data for your area. Public sources such as BLS Occupational Employment and Wage Statistics can support those comparisons. There is no IRS percentage-of-profit rule, and the salary table above is an illustrative starting point, not survey data. Revisit the salary as duties change. Keep documentation (job description, wage comparisons and hours) in case you're ever asked to defend it.

Q: Does switching to S-Corp affect my ability to get bonding or financing? A: It shouldn't, but context matters. Bonding companies and lenders look at personal income, business cash flow, and net worth. A well-documented S-Corp with clean financials, W-2 income, and K-1 pass-through profit reconciled separately from actual cash distributions gives an underwriter clearer evidence. The confusion sometimes arises when distributions aren't reflected in the personal income lenders want to see. Make sure your CPA documents the full income picture clearly, and read our bonding capacity financial playbook for the specifics of how bonding companies underwrite contractor financials.