Tax year 2026 · United States federal
LLC vs S-corp for freelancers
An S-corp election starts paying at around $112,000 of profit, well above where it is usually recommended, because the salary stops being qualified business income. irs.gov
Two things are worth separating before any of it: an LLC is a state law entity and an S-corp is a tax election. They are not alternatives. A single-member LLC is taxed exactly like a sole proprietorship by default — same Schedule C, same self-employment tax — and forming one changes your liability exposure, not your tax bill. The tax question is only ever whether to make the S-corp election, which you can do as an LLC or a corporation.
What the election actually does
It splits your profit into a salary and a distribution. The salary carries payroll tax; the distribution does not. irs.gov That is the entire saving, and it is real.
The part almost every comparison omits is what the split costs.
Your salary is not qualified business income. The 20% deduction applies to business profit, and a W-2 wage is not business profit. irs.gov Converting 60% of your profit into salary removes 60% of it from the QBI base, and a fifth of that disappears as deduction.
At $100,000 of profit that is $8,285 of lost deduction — more than the self-employment tax the election saves.
The arithmetic, with both sides counted
| Net profit | SE tax saved, net | QBI deduction lost | Running costs | Worth it? |
|---|---|---|---|---|
| $60,000 | $2,350 | $3,683 | $2,800 | No, loses $450 |
| $80,000 | $2,588 | $5,984 | $2,800 | No, loses $212 |
| $100,000 | $2,582 | $8,285 | $2,800 | No, loses $218 |
| $120,000 | $2,957 | $10,586 | $2,800 | Yes, by $157 |
| $150,000 | $3,306 | $14,038 | $2,800 | Yes, by $506 |
| $200,000 | $3,939 | $19,793 | $2,800 | Yes, by $1,139 |
The election is negative until about $112,000 of net profit. That is the breakeven, found by searching for the profit where the net saving crosses zero — not a rule of thumb.
And above the breakeven it is still small
That is not an argument against it. It is an argument that the decision is much closer than it is usually presented, and that the range where it clearly wins starts well above where it is usually sold.
Why the usual advice says $40,000
Because it counts one side. “Save 15.3% on everything you take as a distribution” is true, irs.gov and if that were the whole change the breakeven would indeed be low.
Three things get left out, and all three run against the election:
The QBI deduction shrinks, as above. This is the largest omission and it did not exist before 2018, which is part of why the older rule of thumb survives.
Half the self-employment tax was already deductible. A sole proprietor deducts half of it above the line, so the tax being “saved” was never costing its full face value. irs.gov
The running costs are recurring. Payroll service, a second return and state fees do not scale down in a bad year, and the saving does.
Where this calculator stops
At higher incomes the qualified business income deduction becomes subject to a W-2 wage limitation — and an S-corp pays wages while a sole proprietor does not. The limitation can therefore rescue a deduction a sole proprietor loses entirely, which moves the answer substantially toward the election.
This site does not model that limitation, so it declines to answer above the threshold rather than guessing. A number there would be confidently wrong in the direction that happens to sell S-corp formation services, which is the one direction it must not be wrong in.
If your taxable income is near or above the $201,750 threshold as a single filer, irs.gov the figures above do not apply to you and a preparer’s calculation will differ, probably in favour of the election.
Your own numbers
Each quarterly payment
$3,486
- Q1$3,486.35
- Q2$3,486.35
- Q3$3,486.35
- Q4$3,486.36
- Net profit
- $75,000
- Self-employment tax
- $10,597
- Federal income tax
- $4,898
- QBI deduction
- −$10,720
- Total for the year
- $15,495
- Effective rate on profit
- 20.7%
- What you keep
- $59,505
About $1,291 a month set aside, if that is easier to hold to than four lump sums.
State tax not included. State income tax for is not included in this figure. The federal number above is complete; your total liability will be higher by whatever charges. See which states are covered at /state-taxes/, or check your state's revenue department for its current rate. What this site covers, state by state.
The things that are not tax
An LLC without the election still does something. Liability separation is the reason to form one, and it is unrelated to the arithmetic above.
Some states tax S-corps directly. California charges a franchise tax on the entity regardless of profit, and several states do not recognise the federal election at all — which can turn a marginal federal gain into a net loss.
Reasonable salary is a position, not a number. The IRS expects the salary to reflect the value of services actually performed. irs.gov Setting it low is what makes the arithmetic work, and setting it too low is what makes it an audit issue — so the number that maximises the saving and the number that is defensible are pulling against each other.
Health insurance changes treatment. Premiums paid by an S-corp for a more-than-2% shareholder go on the W-2 and are then deducted personally, which is a different route to the same place with different paperwork. irs.gov
Where to stop and ask
Everywhere, honestly. This is the decision on the site with the most moving parts and the largest gap between the arithmetic and the practice.
The useful thing to bring a preparer is not the question “should I do this” — it is the figures above, with the observation that the federal gain at your income is smaller than you were told, so the state treatment and the reasonable-salary position are what will actually decide it.