S corp or LLC in 2027: the profit where a freelancer saves

An S corp saves only on profit above the salary you can defend. At $100,000, a $50,000 salary saves about $4,400; an $80,000 salary costs $1,100.

The Editors · Money · 7 min read · Updated Oct 18, 2026

The Internal Revenue Service Building on Constitution Avenue in Washington, its long limestone facade under a blue sky — Photo: Carol M. Highsmith(opens in a new tab), Public domain(opens in a new tab), via Wikimedia Commons

By the numbers

$4,418federal tax saved a year on $100,000 of profit with a $50,000 salary, before running costs

$1,088what the same election costs a year if the salary has to be $80,000

$192,300the 2027 Social Security wage base

March 15, 2027last day to file Form 2553 for an S election that covers 2027

An S corporation saves a freelancer tax on one thing: the profit you take above a salary the IRS would accept. On $100,000 of profit, a $50,000 salary saves a single filer about $4,400 of federal tax a year, before the cost of running payroll. At an $80,000 salary the same election costs about $1,100 more than staying as you are, because the 20% deduction for qualified business income shrinks as the salary grows. For the election to cover 2027, Form 2553 is due by March 15, 2027.

"S corp or LLC" mixes two different things. An LLC is a legal form your state creates, and for federal tax a one-member LLC is disregarded: you pay as a sole proprietor, on Schedule C, "unless it files Form 8832 and elects to be treated as a corporation" (IRS, Limited liability company, updated October 10, 2026). The S corporation is a tax election, made on Form 2553, open to an LLC. So the real choice is between your LLC's default tax and that election.

What the election changes

As a sole proprietor you pay self-employment tax on 92.35% of your whole profit: 15.3% up to the Social Security wage base, which is $192,300 for 2027, and 2.9% above it (Journal of Accountancy, October 2026). As an S corporation you're its employee. The same 15.3% falls on your salary, half of it paid by the company, and the rest of the profit reaches you as a distribution with no payroll tax on it.

The salary is the IRS's condition. "S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made," and the IRS "has the authority to reclassify payments made to shareholders from non-wage distributions" to wages (IRS, S corporation compensation, updated March 3, 2026). The factors it lists include your training and experience, your duties, the time you put in, and what comparable businesses pay for similar services.

The offset comes from the 20% deduction for qualified business income. It excludes "amounts received as reasonable compensation from an S corporation" (IRS, Qualified business income deduction, updated September 22, 2026). A sole proprietor takes it on the whole profit; an S corporation owner loses it on the salary.

What it saves, by profit

Our arithmetic, for a single filer, on the 2026 brackets and standard deduction (IRS, IR-2025-103, October 9, 2025) and the 2027 wage base, with the salary at half the profit, no state tax and no retirement contributions. The 2027 brackets come out later this autumn and move every row by about inflation.

Net profit	Salary	Payroll tax saved	Income tax added	Federal saving, before running costs
$40,000	$20,000	$2,592	$218	$2,374
$60,000	$30,000	$3,888	$520	$3,368
$80,000	$40,000	$5,184	$1,128	$4,056
$100,000	$50,000	$6,480	$2,062	$4,418
$150,000	$75,000	$9,719	$3,619	$6,100
$200,000	$100,000	$12,959	$5,271	$7,688

$2374$3368$4056$4418$6100$7688

View as table

Federal saving a year with the salary at half the profit
label	Federal saving a year with the salary at half the profit
$40,000 profit	$2374
$60,000 profit	$3368
$80,000 profit	$4056
$100,000 profit	$4418
$150,000 profit	$6100
$200,000 profit	$7688

Source: Market Anarchy calculation: single filer, 2026 brackets (IRS IR-2025-103), 2027 wage base, before running costs

Running an S corporation costs money every year: a payroll service, the corporation's own return on Form 1120-S, state fees, and state unemployment tax on your salary. We use $2,000 a year as a placeholder; replace it with your own quotes. At $2,000 the election starts paying at about $33,000 of profit with a salary of half, and at about $50,000 if the salary has to be 60%. Some states tax S corporations on their own account, so check yours before you count the saving.

The salary decides it

Hold the profit at $100,000 and move only the salary:

Salary	Payroll tax saved	Income tax added	Federal saving, before running costs
$40,000	$8,010	$1,756	$6,253
$50,000	$6,480	$2,062	$4,418
$60,000	$4,950	$2,367	$2,582
$80,000	$1,890	$2,978	-$1,088

The payroll saving shrinks with every dollar of salary, and the deduction you give up grows with it. At $80,000 the deduction lost on the salary outweighs what's left of the payroll saving, and the election loses money before you've paid anyone to run it.

Our reading: if your profit is your own hours, what you'd pay someone else to do your work sits close to the profit itself, and that's where the IRS's factors point. The election pays best when the business earns more than your labor would cost to hire: products you sell, other people's work, clients the business keeps.

What it does to your solo 401(k)

In an S corporation the employer contribution to a solo 401(k) is 25% of your W-2 salary, where a sole proprietor gets 20% of profit after half the self-employment tax (IRS Publication 560). At $100,000 of profit and a $50,000 salary, the most you can put in under 2026's limits falls from $43,087 to $37,000. We set out the sole proprietor's side in the solo 401(k) and SEP comparison.

A high salary brings one more rule: for 2026, anyone with more than $150,000 of FICA wages in 2025 makes catch-up contributions as Roth (IRS Notice 2025-67, November 13, 2025). An S corporation salary is FICA wages. Self-employment income isn't.

Near the ACA cliff

The election also raises your adjusted gross income. A sole proprietor deducts half the self-employment tax on the whole profit; an S corporation deducts the employer half of payroll tax on the salary alone. At $60,000 of profit with a $30,000 salary that's about $1,900 more income on paper. For one person buying Marketplace coverage, the 2027 subsidy ends above $63,840, so near that line the election can cost you the credit. We set out the cliff in the ACA open enrollment page.

The deadline

To be an S corporation from January 1, 2027, file Form 2553 at any time during 2026 or by March 15, 2027: "no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the tax year preceding the tax year it is to take effect" (IRS, Instructions for Form 2553, revised December 2020). The instructions also describe relief for an election filed late. The salary starts with your first paycheck of 2027, and so does payroll. What you owe for 2026, under the default, is on our page on what freelancers owe the IRS.

What changed

October 18, 2026. First published, with the 2027 Social Security wage base, the 2026 brackets and the IRS's pages on reasonable compensation, the qualified business income deduction and Form 2553.