An S corp saves federal tax only on the profit you take as a distribution instead of wages. The salary is still hit by both halves of Social Security and Medicare. Enter the salary you could defend. The savings line is the difference, not a target.
Savings = sole-prop federal tax − (income tax on salary and distribution + both halves of payroll tax).
There is no IRS percentage for reasonable compensation. The test is the work you do, the time you spend, and what a comparable employee would be paid. Savings are the federal difference at the salary you entered.
| Salary as a share of profit | 50% of profit |
|---|---|
| Employer payroll tax | $4,590.00 |
| Employee payroll tax | $4,590.00 |
| Distribution, after employer tax | $55,410.00 |
| Tax as a sole proprietor | $28,461.78 |
| Tax with this salary | $23,302.16 |
| Federal tax saved | $5,159.62 |
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As a sole proprietor the whole profit is on Schedule SE. In an S corp, only the W-2 salary is subject to payroll tax. The employer half is a business expense, so it reduces the profit that passes through. Distributions are not subject to self-employment tax. They are still income.
Both sides use the 2026 standard deduction, brackets, and the simplified 20% QBI deduction. QBI on the S corp side is the pass-through after salary and employer payroll tax, not the salary. The comparison ignores state tax, retirement plans, health insurance, and the reasonable-compensation challenge.
| Sole proprietor | $28,461.78 |
|---|---|
| S corp at this salary | $23,302.16 |
| Federal tax saved | $5,159.62 |
Only on the distribution. The salary is W-2 pay, so you and the corporation each pay 6.2% Social Security, up to the wage base, and 1.45% Medicare. The IRS can reclassify a distribution as wages if the salary is not reasonable for the work.
Yes. Employer Social Security and Medicare reduce the profit that passes through to you. The employee half is not an above-the-line deduction. This comparison counts both halves as tax you pay.
The pass-through is still taxed as ordinary income, and a lower salary can also shrink the QBI base. Medicare never caps. Additional Medicare Tax can apply to the salary. The line here is the net federal difference after those effects.