Consultants / Guide
S-corp vs Solo 401(k) for consultants: the 2026 numbers
The usual pitch for an S-corp is payroll tax: pay yourself a salary, take the rest as distributions, and skip self-employment tax on the distributions. What gets left out is that the same salary decision sets how much you can put in a Solo 401(k). Here is the trade-off at three income levels, using 2026 IRS limits.
Run your own numbers
Payroll tax saved with S-corp
$12,934
SE tax $28,234 → FICA $15,300
Solo 401(k) maximum
$61,677 → $49,500
Sole prop → S-corp: $12,177 less retirement room
SEP IRA maximum
$37,177 as sole prop → $25,000 as S-corp
2026 federal figures (IRS Notice 2025-67, Rev. Proc. 2025-32; SSA wage base). One owner, no employees. Excludes state taxes, the 0.9% Additional Medicare Tax, the QBI deduction and S-corp running costs. Educational estimate, not tax advice; reasonable salary is fact-specific.
Three examples
| Profit | Sole prop: SE tax | S-corp salary | S-corp: payroll tax | Tax saved | Solo 401(k): sole prop → S-corp |
|---|---|---|---|---|---|
| $150,000 | $21,194 | $75,000 | $11,475 | $9,719 | $52,381 → $43,250 ($9,131 less) |
| $250,000 | $29,573 | $125,000 | $19,125 | $10,448 | $71,543 → $55,750 ($15,793 less) |
| $400,000 | $33,591 | $190,000 | $28,388 | $5,203 | $72,000 → $72,000 |
Illustrative 2026 federal figures for one owner, no employees. S-corp salary assumed at 50% of profit, capped at $190,000 (the salary that maxes a Solo 401(k)). Payroll tax is employer + employee FICA. Excludes state taxes, the 0.9% Additional Medicare Tax, the QBI deduction and S-corp running costs.
What the table shows
The S-corp saves payroll tax at every level, roughly $9,719 to $10,448 a year here. The saving shrinks at the top because Social Security tax stops at the $184,500 wage base whether you are an S-corp or not.
But retirement room drops at moderate incomes. As a sole proprietor your employer contribution is about 20% of net earnings. In an S-corp it is 25% of salary only. At $150,000 of profit and a $75,000 salary, the Solo 401(k) maximum falls by $9,131. That is money that would otherwise grow tax-deferred.
At high incomes you can have both. Pay yourself $190,000 and the S-corp Solo 401(k) reaches the full $72,000 ($24,500 deferral + 25% of salary), while distributions above the salary still skip payroll tax.
How to decide
- Run your own profit through the Solo 401(k) calculator to see your sole-proprietor maximum.
- Ask a CPA what a reasonable salary is for your work. That number drives both the payroll-tax saving and your 401(k) room.
- Subtract S-corp costs: payroll service, the 1120-S return, state fees. If the net saving is small, the simpler structure may win.
- Whatever you choose, pay quarterly estimates on time. The quarterly tax calculator shows each payment.
Questions
Does an S-corp reduce how much I can put in a Solo 401(k)?
Usually, unless your salary is high. As a sole proprietor the employer contribution is about 20% of net self-employment earnings. In an S-corp it is 25% of your W-2 salary only, and distributions don't count. An S-corp owner needs a $190,000 salary to reach the $72,000 2026 maximum.
How much salary should an S-corp consultant pay themselves?
The IRS requires reasonable compensation for the services you perform, roughly what you would pay someone else to do your job. There is no fixed percentage. This guide uses 50% of profit only to illustrate the trade-off; set your actual salary with a CPA.
At what income does an S-corp make sense for a consultant?
The payroll-tax savings grow with profit, but so do the costs: running payroll, a separate business tax return, and state fees. Social Security tax also stops at the $184,500 wage base in 2026, so the savings flatten at higher incomes. Many advisers start the conversation somewhere above $80,000 to $100,000 of steady profit.
What does this comparison leave out?
State income and franchise taxes, the 0.9% Additional Medicare Tax, the qualified business income (QBI) deduction (which an S-corp salary reduces), health insurance, and the cost of running an S-corp. Each can move the answer, which is why the numbers here are a starting point for a CPA conversation.
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On Android? Get the app on Google PlaySources: IRS Notice 2025-67 (2026 retirement plan limits), IRS Rev. Proc. 2025-32 (2026 brackets), SSA 2026 contribution and benefit base. Educational information only, not tax, legal or investment advice.