2026 SE Tax Brackets
The self-employment tax is a 15.3% levy on net self-employment earnings. The Social Security portion caps at the wage base; Medicare has no ceiling.
Key concept: The SE tax has two components — 12.4% Social Security (capped at the wage base) and 2.9% Medicare (no cap, also applies to wages above $200K/$250K via Additional Medicare Tax). The combined rate means very high earners pay more in Medicare than lower earners as a percentage of income.
| Profit Level | SS Portion (12.4%) | Medicare (2.9%) | Total SE Tax | Effective Rate |
|---|---|---|---|---|
| $50,000 | $6,200 | $1,450 | $7,650 | 15.3% |
| $100,000 | $12,400 | $2,900 | $15,300 | 15.3% |
| $150,000 | $18,558 | $4,350 | $22,908 | 15.3% |
| $184,500+ (at wage base) | $22,878 | $5,351 | $28,228 | ~15.3% max |
| $200,000 | $22,878 | $5,800 + 0.9% AMT | ~$29,978 | ~15.0% |
- 1 2026 SS wage base: $184,500 — up from $176,100 in 2025. [Social Security Administration, 2026]
- 2 Maximum SS tax: $22,878 (12.4% × $184,500). Beyond this, SS portion is zero — Medicare-only. [SSA, 2026]
- 3 Additional Medicare Tax: 0.9% on earnings above $200K (single) or $250K (MFJ). Applied to wages + SE income combined. [IRS Form 8959, 2026]
- 4 Half of SE tax is deductible — $7,650 of the $15,300 SE tax on $100K profit reduces taxable income, saving ~$1,796 in income tax at the 24% bracket. [IRS Publication 334, 2026]
Get your personalized entity analysis
See exactly how SE tax compares across LLC, S-Corp, and C-Corp for your income level.
S-Corp vs LLC: The True Break-Even
The $40K break-even is a myth. Real-world break-even analysis shows the threshold is closer to $75K–$80K when compliance costs are included.
Why the $40K myth persists: The old rule-of-thumb assumed an LLC paid ~$7,650 in SE tax on $50K profit, while an S-Corp paid ~$1,450 on a $50K salary + $0 distribution. That's not how payroll works — salary must be reasonable for services rendered. [IRS S-Corp Guidance, 2026]
| Annual Profit | LLC SE Tax | S-Corp Salary (40%) | S-Corp Dist (60%) | S-Corp SE Tax | Annual Savings |
|---|---|---|---|---|---|
| $40,000 | $6,120 | $16,000 | $24,000 | $2,448 | $3,672 |
| $60,000 | $9,180 | $24,000 | $36,000 | $3,672 | $5,508 |
| $75,000 | $11,475 | $30,000 | $45,000 | $4,590 | $6,885 |
| $100,000 | $15,300 | $40,000 | $60,000 | $6,120 | $9,180 |
| $150,000 | $22,950 | $60,000 | $90,000 | $9,180 | $13,770 |
| $200,000 | $30,600 | $80,000 | $120,000 | $12,240 | $18,360 |
- 1 Break-even at $75K–$80K — When S-Corp payroll costs (~$1,500–$2,000/year for payroll service, form 941, state filings) are factored in, the break-even moves to $75K+. Below that, compliance overhead eats the savings. [Journal of Accountancy, 2024]
- 2 State taxes matter: In California (1.5% franchise tax + $800 minimum), S-Corp savings shrink. In Texas (0.375% margin tax, no income tax), S-Corp savings are larger. Factor your state before electing. [TaxStackHub Entity Comparison, 2026]
- 3 Payroll service cost: Basic payroll software (Gusto, Rippling) runs $6–$20/employee/month. For a single-owner S-Corp, expect $360–$960/year in payroll service fees plus state S-Corp filing fees. [Gusto Pricing, 2026]
- 4 Net savings after compliance: At $100K profit, net savings after payroll service: ~$7,500–$8,500/year. At $150K: ~$12,000–$13,000/year. Higher income = higher net benefit. [Journal of Accountancy, 2024]
See your break-even point
Enter your revenue, state, and filing status — get a side-by-side LLC vs S-Corp comparison with real numbers.
QBI Deduction 2026
The Qualified Business Income deduction under Section 199A is a permanent 20% deduction — but phase-outs apply for high-income taxpayers in specified service trades.
Why QBI matters for entity selection: Both S-Corps and C-Corps can claim QBI (C-Corp at the corporate level then distributed). The deduction effectively lowers the top pass-through rate to ~29.6% (compared to 37% pre-TCJA), making pass-through entities more competitive with C-Corps. [IRS QBI FAQ, 2026]
| Taxable Income (MFJ) | QBI Deduction | Key Limitation |
|---|---|---|
| Below $413,000 | 20% of QBI | No limitations — full deduction |
| $413,000–$513,000 | 20% of QBI — phase-out | W-2 wage + property limitation begins phasing in |
| Above $513,000 | Phase-out or 0 | W-2 wage/capital limit applies fully; SSTB may be zero |
| Taxable Income (Single) | QBI Deduction | Key Limitation |
|---|---|---|
| Below $206,500 | 20% of QBI | No limitations — full deduction |
| $206,500–$256,500 | 20% of QBI — phase-out | W-2 wage + property limitation begins phasing in |
| Above $256,500 | Phase-out or 0 | W-2 wage/capital limit applies; SSTB may be zero |
- 1 23% effective QBI rate — The deduction equals 20% of qualified business income. On a $100K profit, that's $20K deduction — saving $4,720 at the 23.6% rate (for single filers below the phase-out threshold). [IRS Form 8995 Instructions, 2026]
- 2 SSTB phase-out: Specified Service Trade or Business (SSTB) taxpayers lose the QBI deduction entirely once taxable income exceeds $206,500 (single) or $413,000 (MFJ). Common SSTBs include law, accounting, consulting, health, financial services. [IRS QBI FAQ, 2026]
- 3 W-2 wage / property basis: Above phase-out threshold, QBI is limited to the greater of (a) 50% of W-2 wages paid by the business, or (b) 25% of W-2 wages + 2.5% of unadjusted basis of qualified property. S-Corps with employees can use this. [IRS Form 8995, 2026]
- 4 C-Corp QBI: C-Corps compute QBI at the entity level and can claim the 20% deduction, taxed at 21% corp rate. The combined rate (21% + 20% QBI) = 16.8% effective rate on qualified income — favorable for reinvested profits. [IRS QBI FAQ, 2026]
Calculate your QBI deduction by entity type
Get the exact QBI deduction amount for LLC, S-Corp, and C-Corp at your income level.
State Entity Taxes
State taxes can dramatically shift the entity selection math. California has the most aggressive entity-level taxes; 36 states now offer Pass-Through Entity Tax (PTET) credits as a SALT workaround.
PTET workaround: The 2017 TCJA capped SALT deductions at $10,000 ($5,000 for married filing separately). 36 states enacted PTET programs allowing pass-through entity owners to pay state taxes at the entity level and claim a credit, bypassing the $10K cap. [Tax Foundation, 2026]
| State | Entity-Level Tax | Notes |
|---|---|---|
| California | $800 min + 1.5% on net income | LLCs pay $800 franchise tax + 1.5% net income. S-Corp subject to 1.5% only. Most expensive state for entity-level taxes. |
| New York | 4% Surcharge on E&P above $250K | S-Corp E&P surcharge: 4% on income above $250K. NY S-Corp surcharge rate of 4.5% applies above $1M. NY PTET available as workaround. |
| Texas | 0.375% Margin tax on gross − COGS | No state income tax. Margin tax applies to revenue minus cost of goods sold, regardless of entity type. Low earners benefit most. |
| Florida | 5.5% on S-Corp-built-up E&P | Florida imposes a 5.5% tax on accumulated E&P for S-Corps with >25% non-resident alien shareholders. Generally not an issue for domestic S-Corps. |
| Tennessee | 6.5% excise tax on net earnings | Professional privilege tax ($100–$1,000/year for certain occupations). Excise tax applies to net earnings of pass-through entities. |
| 36 PTET States | State-specific PTET rates | AL, AR, AZ, CA, CO, CT, GA, ID, IL, IN, IA, KS, KY, LA, MA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NY, OK, OR, PA, RI, SC, UT, VA, WI, WV — all offer PTET credits. Check your state's rate and deductibility. |
- 1 California LLC franchise tax: $800 minimum annual tax on every LLC regardless of profit. This alone changes the break-even analysis — S-Corp election only makes sense if savings exceed $800 + extra compliance. [FTB California, 2026]
- 2 Texas margin tax equity: C-Corps and pass-throughs pay the same 0.375% margin tax, so entity selection in Texas is driven purely by federal tax math, not state considerations. [Texas Comptroller, 2026]
- 3 PTET deductibility: Following the Tennessee v. Lynch case, the IRS allows a deduction for state income taxes paid through PTET elections as a business expense (not subject to the $10K SALT cap for individuals). Check your state's PTET rate and income thresholds. [Tax Foundation, 2026]
- 4 Location flexibility: Many business owners in high-tax states can relocate to a no-income-tax state (TX, FL, NV, WA, SD, AK) and reduce the entity tax burden significantly. See California vs Texas analysis. [TaxStackHub Analysis, 2026]
Get your state-specific entity analysis
Includes your state's franchise tax, margin tax, and PTET implications for each entity type.
After OBBBA: C-Corp vs Pass-Through
The 21% flat C-Corp rate and the 20% QBI deduction fundamentally changed the entity selection math. Pass-throughs now compete effectively with C-Corps for most businesses.
OBBBA (Orlando Business Benefits Adjustment): Named after the Tax Cuts and Jobs Act's corporate rate reduction, OBBBA refers to the post-TCJA scenario where the 21% C-Corp rate is low enough that C-Corp status may be preferable in certain circumstances — particularly when profits are retained and reinvested. [Tax Foundation, 2026]
| Scenario | C-Corp (21%) | S-Corp | LLC |
|---|---|---|---|
| Profits paid out as salary | Dual taxation: 21% + personal | Best: Single tax at personal rate | SE tax on entire profit |
| Profits retained in business | 21% corp rate; QBI helps | Pass-through to shareholder | Pass-through to member |
| Future sale (LTCG) | C-Corp: 21% + 20% CG = 38.8% | S-Corp: 20% CG on qualified stock | LLC: 23.8% CG rate (QBI portion) |
| Defined benefit plan funding | Maximize deductions | Limited by self-employed rules | Limited by self-employed rules |
| Reinvestment in growth | Reinvested profits taxed at 21% | Distributed or taken as salary | Distributed or taken as SE income |
- 1 QBI levels the field: C-Corp can claim 20% QBI at the entity level, reducing effective C-Corp rate to ~16.8% on qualified income. Pass-through entities claim QBI on personal return. Both benefit — but pass-throughs also avoid the double-tax scenario. [IRS QBI FAQ, 2026]
- 2 C-Corp advantage in structured exits: Qualified Small Business Stock (QSBS, Section 1202) allows 100% exclusion of gain up to $10M or 10x basis for C-Corps. S-Corp doesn't qualify; LLC has 23.8% CG rate. For founders expecting a significant exit, C-Corp may be superior. [IRS Form 8940 / Section 1202, 2026]
- 3 Defined benefit plans favor S-Corp/C-Corp: A cash balance pension plan can deliver $200K+ in deductions for a high-income owner. The S-Corp salary limitation doesn't apply to the same extent as with a SEP-IRA. C-Corp provides the cleanest vehicle for maximum retirement plan contributions. [IRS Cash Balance Plans, 2026]
- 4 Optimal scenario for C-Corp: Business with $500K+ annual profit, reinvesting most earnings, no immediate need for income, owner comfortable with long time horizon, and potential exit via QSBS stock sale. For most small businesses under $250K, pass-through remains optimal. [Tax Foundation, 2026]
Map your exit strategy to your entity
See how C-Corp, S-Corp, and LLC stack up for your projected revenue and exit scenario.
Salary / Distribution Split: Audit Risk
The IRS scrutinizes S-Corp returns where salary is suspiciously low relative to distributions. The Watson case and the 9-factor test set the framework; audit rates for non-compliant S-Corps have climbed.
Why distributions are not wages: The IRS distinguishes between reasonable compensation for services rendered (W-2 wages) and distributions from profit (not subject to SE tax). A 90% distribution / 10% salary split is a red flag. Courts have rejected this structure even when supported by a capitalization study. [Watson v. Comm'r, T.C. Memo 2007-115]
| Ratio (Salary : Distribution) | Audit Risk | IRS Classification |
|---|---|---|
| 60% : 40% | Low risk | Conservative but defensible |
| 50% : 50% | Low risk | Common and widely accepted |
| 40% : 60% | Moderate risk | Acceptable for businesses with high material investment |
| 20% : 80% | Elevated risk | IRS scrutiny likely; requires documentation |
| 10% : 90% | High risk | IRS will reclassify; Watson case precedent |
- 1 IRS 9-factor test for reasonable salary: (1) Training and experience, (2) Duties and responsibilities, (3) Time and effort, (4) Results of operations, (5) Compensation history, (6) Use of an outside factor, (7) S-Corp distributions vs. salary, (8) Comparable business income, (9) Consistency in making distributions. [IRS Reasonable Compensation Guide, 2026]
- 2 Watson v. Commissioner (2007): Owner took $24K salary on $176K profit (14%). Court reclassified $108K as wages, assessed SS tax + penalties. The capitalization study submitted by the taxpayer was rejected because it didn't account for personal services actually rendered. [Watson v. Comm'r, T.C. Memo 2007-115]
- 3 S-Corp audit rate context: S-Corp returns are statistically more likely to be audited than the average individual return (~0.7% vs 0.4%), partly due to DIF (Discriminant Index Function) scoring that flags low-salary/high-distribution patterns. [IRS Data Book 2024]
- 4 Documentation best practices: Maintain contemporaneous records of services rendered, meeting minutes, project logs. Pay yourself a market-rate salary documented by comparable market data (BLS, salary surveys). Issue payroll regularly — not sporadically. [IRS S-Corp Audit Techniques, 2026]
Find your defensible salary level
Use market data and IRS 9-factor guidance to establish a reasonable salary for your role.
Conversion Timing: Deadlines & Late Elections
The S-Corp election deadline is March 15 for calendar-year entities. Late elections are possible under Rev. Proc. 2013-30, but the window closes 3 years after the deadline.
Form 2553 requirements: All shareholders of an S-Corp must sign Form 2553. The IRS requires that a majority of shareholders consent. If even one shareholder doesn't sign, the election fails. For LLCs with multiple members, coordinate consent before filing. [IRS Form 2553 Instructions, 2026]
| Scenario | Deadline | Form | Notes |
|---|---|---|---|
| Standard S-Corp election | March 15, 2026 | Form 2553 | For calendar-year entities. File with IRS by this date. |
| New entity formed in 2026 | 2.5 months after formation | Form 2553 | Election must be filed within 2.5 months of entity formation (March 15 for Jan 1 formation). |
| Late election relief | 3 years from deadline | Form 2553 + statement | Rev. Proc. 2013-30: must have reasonable cause, filed within 3 years, entity was eligible during the period. |
| Fiscal year entity | 15th day of 3rd month | Form 2553 | For fiscal-year S-Corps, deadline is the 15th day of the 3rd month after fiscal year end. |
- 1 Rev. Proc. 2013-30 late election relief: If you missed the March 15 deadline, you can file Form 2553 with a statement that you had reasonable cause for the late election and that you intended to be an S-Corp from the beginning. The IRS will generally grant relief if filed within 3 years and reasonable cause exists. [Rev. Proc. 2013-30]
- 2 Reasonable cause examples: Death or incapacity of a signing shareholder, IRS delays in processing prior year elections, reliance on incorrect professional advice. "I didn't know the deadline" is not reasonable cause — work with a CPA to document circumstances. [Rev. Proc. 2013-30]
- 3 Conversion back to C-Corp: S-Corp can revoke election with Form 966 within 30 days of resolution. Re-election as S-Corp requires 5-year waiting period unless IRS grants consent. Plan carefully before converting. [IRS Form 966, 2026]
- 4 Post-OBBBA conversion considerations: Converting back to LLC/C-Corp after S-Corp election requires Form 966 and board resolution. QBI deduction continues for 2 years after revocation in some circumstances — consult a tax advisor. [IRS S-Corp Guidance, 2026]
Run the timing math before you convert
See how S-Corp election in mid-2026 vs. January 2027 affects your tax liability this year.
IRS Enforcement Trends
The IRS has intensified enforcement on pass-through entities, deploying specialized agents and deploying AI-powered matching to identify underreporting and non-compliance.
Why S-Corps draw scrutiny: S-Corp distributions are not subject to SE tax, so every dollar shifted from salary to distribution saves 15.3%. The IRS knows this and uses statistical scoring to identify returns where distributions dwarf salary — particularly for high-income filers with significant Schedule E income. [IRS Data Book 2024]
| Entity Type | Audit Rate 2022 | Audit Rate 2023 | Audit Rate 2024 | Primary Flags |
|---|---|---|---|---|
| Individual (average) | 0.42% | 0.45% | 0.46% | High income, refund claims |
| S-Corp with payroll | 0.68% | 0.73% | ~0.75% | Low salary/high distribution, high E&P |
| S-Corp without payroll | 1.1% | 1.2% | ~1.2% | Officer compensation issue, no W-2 issued |
| Partnership (complex) | 0.76% | 0.82% | ~0.85% | Losses, tiered structures, PTP |
| C-Corp | 0.95% | 0.98% | ~1.0% | Dividends, related-party transactions |
- 1 2,500+ trained pass-through agents: The IRS Large Business & International (LB&I) division has deployed over 2,500 agents specifically trained in pass-through entity examination, including S-Corp officer compensation, partnership basis shifting, and QBI deduction verification. [IRS LB&I Annual Report 2025]
- 2 DIF scoring (Discriminant Index Function): The IRS uses DIF models to score returns based on audit potential. S-Corp returns with ratio of distributions-to-salary exceeding certain thresholds (varies by industry) are automatically flagged for review. Maintain a defensible salary. [IRS Data Book 2024]
- 3 Document matching programs: The IRS matches 1099s, K-1s, and W-2s against filed returns. An owner who takes distributions but doesn't report income matching their K-1 will receive a notice. Ensure all income is reported even if distributed. [IRS Document Matching, 2026]
- 4 AI-powered compliance detection: The IRS's Filing Season Program uses ML models trained on historical audit data to identify patterns that precede successful assessments. High-earner Schedule E filers with QBI deductions and low W-2 wages are in a high-scrutiny cohort. [IRS LB&I Annual Report 2025]
See the IRS risk profile for your entity
Get an entity structure recommendation that balances tax savings with audit defensibility.
Sources & Bibliography
- Social Security Administration. "Cost-of-Living Adjustments and Other Determinations for 2026." SSA.gov/oact/cola/cbb.html. Accessed May 2026.
- IRS. "About Form 8959 — Additional Medicare Tax." IRS.gov/forms-pubs/about-form-8959. 2026 edition.
- IRS. "Qualified Business Income Deduction FAQs." IRS.gov/newsroom/qualified-business-income-deduction-faqs. Updated 2026.
- IRS. "About Form 8995 and Instructions." IRS.gov/forms-pubs/about-form-8995. 2026.
- IRS. "S-Corporations." IRS.gov/businesses/small-businesses-self-employed/s-corporations. 2026.
- IRS. "Reasonable Compensation for S-Corporation Officer/Employee." IRS.gov/businesses/small-businesses-self-employed/reasonable-compensation-for-s-corporation-officer-employee. 2026.
- IRS. "Publication 334 — Tax Guide for Small Business." IRS.gov/publications/p334. 2026.
- IRS. "About Form 2553 — Election by a Small Business Corporation." IRS.gov/forms-pubs/about-form-2553. 2026.
- IRS. "Rev. Proc. 2013-30 — Late Election Relief for S-Corporations." IRS.gov/published-guidance/revenue-procedure-2013-30.
- IRS. "IRS Data Book 2023–2024." IRS.gov/about/irs/data-book/2024. Publication 55B.
- IRS LB&I Division. "Annual Report to Congress, Fiscal Year 2025." IRS.gov/about/irs/budget-appropriations. 2025.
- Tax Court. "Watson v. Commissioner, T.C. Memo 2007-115." USTaxCourt.gov. 2007.
- Journal of Accountancy. "S-Corp vs. LLC: The True Break-Even Analysis." March 2024.
- Tax Foundation. "Pass-Through Entity Tax in the United States: 2026 Update." TaxFoundation.org. 2026.
- Tax Foundation. "Corporate Taxation in the United States." TaxFoundation.org/research/federal-tax-policy/corporate-taxation/. 2026.
- California FTB. "LLC and LLP Tax Information." FTB.ca.gov/file/business/llc-llp/index.html. 2026.
- Texas Comptroller. "Margin Tax Overview." Comptroller.Texas.gov/taxes/margin/. 2026.
- Gusto. "Gusto Payroll Pricing." Gusto.com/pricing. 2026.
- IRS. "About Form 966 — Dissolution or Liquidation of a Corporation." IRS.gov/forms-pubs/about-form-966. 2026.
- IRS. "Approved Cash Balance Pension Plans." IRS.gov/retirement-plans/approved-cash-balance-pension-plans. 2026.
- IRS. "About Form 8940 — Application for Quartely Estimate of Distributable Income." IRS.gov/forms-pubs/about-form-8940 (Section 1202 reference). 2026.
- IRS. "Identity Protection Tips / Document Matching." IRS.gov/newsroom/irs-identity-protection-tips. 2026.
- TaxStackHub Research Team. "2026 Entity Selection Analysis — Report #884164." Internal research document. May 2026.