For many small business owners, the transition from a "side hustle" to a "serious business" is marked by one thing: the first time they see their self-employment tax bill.
In 2026, with the One Big Beautiful Bill (OBBB) making many small business tax cuts permanent, choosing between a standard LLC and an S-Corp election is one of the most important financial decisions you will make.
The Problem: The 15.3% "Self-Employment Tax"
If you operate as a standard Single-Member LLC or a Sole Proprietor, the IRS treats you and your business as one entity. This means you pay a 15.3% self-employment tax on every dollar of net profit you earn.
- 12.4% goes to Social Security (up to the 2026 wage base of $176,100).
- 2.9% goes to Medicare (no limit).
If your business clears $100,000 in profit, you are looking at roughly $15,300 in self-employment taxes before you even get to your regular income tax.
The Solution: The S-Corp "Split"
When you elect to be taxed as an S-Corp (using Form 2553), you become an employee of your own company. This allows you to split your income into two buckets:
- Reasonable Salary: You pay yourself a W-2 wage. This is subject to the 15.3% tax.
- Distributions: The remaining profit is paid to you as a "shareholder distribution." Distributions are NOT subject to self-employment tax.
The 2026 Math: A Side-by-Side Comparison
Imagine your business earns $120,000 in net profit this year.
| Tax Item |
LLC (Default) |
S-Corp Election |
| W-2 Salary |
$0 |
$65,000 (Reasonable Salary) |
| Shareholder Distribution |
$120,000 |
$55,000 |
| Income Subject to SE Tax |
$120,000 |
$65,000 |
| Self-Employment Tax (15.3%) |
$18,360 |
$9,945 |
| ESTIMATED SAVINGS |
$0 |
$8,415 |
Note: Even after accounting for the extra costs of payroll and S-Corp tax filing (Form 1120S), this owner still walks away with thousands in extra profit.
What the IRS Watches for in 2026
You can't just pay yourself a $1 salary to avoid taxes. The IRS requires "Reasonable Compensation." In 2026, the IRS is using advanced data matching to flag S-Corps in which distributions significantly exceed salaries.
To stay safe, your salary should reflect what you would have to pay someone else to do your job. For most service-based businesses, we look at industry benchmarks like:
- Consultants: $75k – $160k
- Construction Trades: $55k – $130k
- Real Estate Agents: $50k – $120k
Is it Time to Switch?
The general "break-even" point in 2026 is approximately $75,000 to $80,000 in net profit. If you are earning less than that, the costs of running payroll and filing a corporate return may eat up your tax savings. If you are earning more, you are likely overpaying the IRS every single month.
