At $150,000 of net profit, a sole proprietor or single-member LLC contractor owes about $21,194 in self-employment tax before a dollar of income tax. That’s the 15.3% that funds Social Security and Medicare, and it lands on top of whatever bracket you’re in.
An S-corp election can cut a chunk of that. It can also cost you $3,000 a year in payroll and tax prep to save $2,000. The difference is your net profit number — and one wrinkle in the qualified business income deduction that almost nobody mentions.
Here’s the math.
First: quarterly taxes, because that’s what actually bites
Nobody withholds taxes from a customer check. You do it yourself, four times a year.
Federal estimated payments are due roughly April 15, June 15, September 15, and January 15 of the following year. Miss them and the IRS charges an underpayment penalty that floats with federal interest rates — it’s been in the 7–8% annualized range recently. Check the current rate before you decide it’s cheap money.
The way out is the safe harbor. You avoid the penalty if you pay the lesser of:
- 90% of the current year’s total tax, or
- 100% of last year’s total tax (110% if your prior-year adjusted gross income was over $150,000)
That second option is the one to use. It’s a known number. Take last year’s total tax from your 1040, multiply by 1.0 or 1.1, divide by four, and set a calendar reminder.
Set aside 25–30% of net profit in a separate account as you go. Not 25–30% of revenue — of profit, after materials and subs. If you don’t know your profit month to month, that’s the real problem, and a simple job costing habit plus a clean QuickBooks setup fixes it faster than any tax strategy.
Most states with an income tax want quarterlies too, usually on the same schedule. Your state’s revenue department website will have the form and the due dates.
What an S-corp election actually changes
An S-corp is not an entity. It’s a tax election you make on top of an LLC (or a corporation). Form 2553 to the IRS.
It does not change your liability protection. That comes from the LLC itself, and the rules are covered in LLC vs sole proprietor. Electing S-corp status doesn’t make you safer. It changes one thing:
As a sole prop or default LLC, all your net profit is subject to self-employment tax. As an S-corp, you put yourself on payroll at a reasonable salary. That salary pays FICA (7.65% employee + 7.65% employer = 15.3%). Everything above it comes out as a distribution and pays no FICA.
That’s the whole trick. The savings equal 15.3% of the profit you move out of wages.
The math at three profit levels
Self-employment tax is 15.3% on 92.35% of net profit, with the 12.4% Social Security portion capped at the annual wage base (about $176,100 for 2025 — it rises every year, so check the current figure).
| Net profit | SE tax as sole prop | Example salary as S-corp | FICA on salary | Raw FICA savings |
|---|---|---|---|---|
| $80,000 | $11,304 | $55,000 | $8,415 | $2,889 |
| $150,000 | $21,194 | $85,000 | $13,005 | $8,189 |
| $250,000 | $28,532 | $110,000 | $16,830 | $11,702 |
(The $250k row ignores the extra 0.9% Medicare surtax on earnings over $200,000, which adds a few hundred dollars on the sole prop side.)
Those look like good numbers. Now subtract what the election costs to run.
The cost column
| Annual cost | Typical range |
|---|---|
| Payroll service (Gusto, QuickBooks Payroll, etc.) | $500–$900 |
| 1120-S corporate return prep | $800–$1,800 |
| State franchise tax / S-corp fee | $0–$800+ |
| FUTA and state unemployment on your own wages | $100–$600 |
| Total | $1,800–$3,500 |
That state line is the one that surprises people. California charges an $800 minimum franchise tax plus 1.5% of S-corp net income. Several other states have their own fees or entity-level taxes. Look yours up before you run any numbers — it can swing the answer by itself.
At $80,000 of profit: $2,889 of savings against $1,800–$3,500 of cost. You are working harder to break even.
The QBI wrinkle nobody tells you about
Here’s the part that quietly eats your savings.
The qualified business income deduction lets you deduct 20% of your business profit. Contracting is not a specified service trade, so you generally qualify. But W-2 wages you pay yourself are not qualified business income. Every dollar you move from profit to salary shrinks the 20% deduction.
Run the $150,000 case for a filer whose taxable income is below the QBI thresholds:
| Sole prop / LLC | S-corp, $85k salary | |
|---|---|---|
| Net profit | $150,000 | $150,000 |
| Less: half SE tax / employer FICA | $10,597 | $6,503 |
| Less: W-2 wages | — | $85,000 |
| QBI base | $139,403 | $58,497 |
| 20% deduction | $27,881 | $11,700 |
| Tax value at 22% marginal | $6,134 | $2,574 |
You lose about $3,560 of income tax benefit to gain $8,189 of FICA savings. Subtract $2,500 of payroll and prep costs and you’re at roughly $2,100 of real savings on $150,000 of profit.
Still positive. Not the $8,000 the first table implied.
Notice how sensitive it is to the salary number. Same $150,000 profit with a defensible $70,000 salary instead of $85,000:
- FICA savings: $10,484
- QBI value lost: $2,849
- Costs: $2,500
- Net: about $5,135
Lower salary, better outcome — which is exactly why the IRS pays attention to it.
Above the thresholds, the math flips
Once your taxable income rises past the QBI income thresholds (around $197,300 single / $394,600 married filing jointly for 2025, indexed annually), the deduction gets limited by how much W-2 wages your business pays. A high-earning sole proprietor with zero payroll can watch the deduction phase down toward nothing. An S-corp paying you a real salary preserves it.
So at higher profit, the S-corp helps twice: FICA savings and protecting the deduction. At moderate profit, it helps once and hurts once.
This is the single best reason to have a CPA run your actual numbers instead of trusting a table — including this one.
Reasonable compensation: the part that gets audited
You can’t pay yourself $20,000 and take $230,000 in distributions. The IRS standard is “reasonable compensation” for the work you actually do, and recharacterizing lowball salaries is a known enforcement area. Penalties and back payroll taxes follow.
How to defend your number:
- Split your roles. If you spend 70% of your week installing and 30% running the business, price each piece. A journeyman electrician wage for the field hours, an owner/estimator wage for the office hours.
- Use local wage data. Bureau of Labor Statistics occupational wage data for your trade and metro area is free and is what a CPA will reference.
- Write it down once a year. A one-page memo with your hour split and the wage sources, saved in your tax folder.
- Don’t let salary drop when profit spikes. If your profit doubles because you hired crew and stopped swinging a hammer, your salary may legitimately shift toward management wages — but document the shift.
If you’re still the one doing most of the physical work, your reasonable salary is high and your distribution is small. That’s the quiet reason S-corps underdeliver for solo contractors: there isn’t much profit above a fair field wage to shelter.
The rough decision line
| Net profit (after paying yourself) | Verdict |
|---|---|
| Under $60,000 | No. The savings don’t cover the costs. |
| $60,000–$100,000 | Usually no. Marginal at best. Revisit next year. |
| $100,000–$175,000 | Maybe. Real savings, but run the QBI math first. |
| $175,000+ | Usually yes, especially as the QBI wage limits kick in. |
That assumes a single-owner shop with no unusual state tax. A California contractor’s line sits higher than a Texas contractor’s.
If you’re pushing toward the top of that table, the tax election is one of several things that change at once — see the bottlenecks between $100k and $500k.
What the election actually costs you in time
Beyond money:
- Payroll runs at least monthly, on schedule, forever. Miss them and you create a mess that’s expensive to unwind.
- A separate 1120-S return due March 15, a month before your personal return. Late filing penalties run a few hundred dollars per shareholder per month.
- A K-1 that has to flow onto your 1040, which means your personal return can’t be finished until the corporate one is.
- Real bookkeeping discipline. Owner draws and business expenses can no longer be casually mixed.
- Harder to unwind than to start. Revoking an S election generally locks you out of re-electing for five years.
Mechanics, if you decide to do it
Form 2553 is due by the 15th day of the third month of the tax year you want it to apply to — March 15 for a calendar-year business. Miss it and Rev. Proc. 2013-30 provides late election relief in many cases, but don’t plan on it.
You’ll also need an EIN, a payroll provider, and a bookkeeper or CPA who has seen contractor books before.
Your next move
Pull last year’s Schedule C. Take the net profit line, subtract a fair market wage for the work you personally did, and look at what’s left. If that remainder is under about $50,000, the S-corp election is not your problem this year — your pricing is.
If it’s over $50,000, email your CPA this one question: “Given my filing status and expected taxable income, what does an S-corp election save me after the QBI reduction and my state’s entity fees?”
An hour of their time is cheaper than a year of payroll runs that saved you nothing.