Pays Less Taxes Same profit, different tax: a worked example

Both owners are made up. Your numbers will differ.

• Each owner is single, has $140,000 of business profit for 2026 and no other income.
• Each takes the 2026 standard deduction of $16,100.
• We count federal income tax and Social Security and Medicare tax only. State tax is left out.
• Both owners land in the 22% federal bracket, so we use 22% for the income tax difference.
• The cost of a payroll service and the S corp's tax return is left out. It comes off Owner B's saving.

Owner A files a Schedule C and makes no other moves.

• Self-employment tax: 15.3% of 92.35% of $140,000, about $19,780.
• Half of that, about $9,890, is deductible.
• The QBI deduction is about $22,800. It's 20% of taxable income here, because that's the smaller of the two tests.
• Taxable income: about $91,210.

Owner B elects S corp status and makes two more moves.

• Salary through payroll: $70,000. Payroll tax on it, both halves: $10,710.
• Solo 401(k): $24,500 deferred from the salary, plus $17,500 from the company, which is 25% of the salary.
• HSA with self-only coverage: $4,400.
• Profit left for the K-1, after the salary, the company's half of payroll tax and the 401(k) deposit: about $47,150.
• The QBI deduction is about $9,430, smaller than Owner A's, because a salary doesn't count as business income.
• Taxable income: about $62,720.

Here's where Owner B's saving comes from.

• Social Security and Medicare: $19,780 for Owner A and $10,710 for Owner B. About $9,070 less.
• Taxable income: about $28,490 lower for Owner B. At 22%, that's about $6,270 less income tax.
• Together: about $15,340 less federal tax for the year.
• Owner B also has $46,400 in a 401(k) and an HSA. The 401(k) part gets taxed when it comes out in retirement.

Take out the cost of payroll and the S corp return, and Owner B still comes out well ahead at this profit. At a smaller profit, the gap shrinks and the costs matter more.

Two owners who compare deposits often think their years match. What's left after payroll, rent, suppliers and loan payments is the profit, and that's what gets taxed.

That's why the first thing we look at is your profit and loss, kept current in QuickBooks Online. Every move on this site gets sized from it.

Is Owner B doing anything risky? No. Each move is in the tax law and backed by records: payroll reports, plan documents and the HSA statement. The salary fits the work.

Would the S corp alone save that much? The S corp part is about $9,070 before costs and before the smaller QBI deduction. The retirement plan and the HSA add the rest.

Can you run this with my numbers? Yes. That's what the free 30-minute call is for. Bring last year's return and this year's profit so far.