If you are a profitable sole proprietor or single‑member LLC, 2026 is the year to re‑check whether your current setup still makes tax sense. With the One Big Beautiful Bill Act making the QBI deduction permanent and expensing rules more generous, an S‑corp election can cut self‑employment taxes—but only if your numbers and salary strategy truly support it.
This guide walks through when a move from sole prop to S‑corp is worth exploring, how the 2026 rules shape that decision, and what to watch so you do not swap one set of headaches for another.
Sole prop vs. S‑corp: 2026 basics
As a sole proprietor or single‑member LLC, your net business profit is generally subject to both income tax and the full 15.3% self‑employment tax. It is simple and flexible, but as profits climb, the payroll tax bill climbs right alongside them.
An S‑corp is still a pass‑through for income tax, but you split earnings into two buckets:
- Reasonable salary (subject to payroll taxes).
- Distributions (not subject to self‑employment tax, though still subject to income tax).
That split is where most potential tax savings come from—and where the IRS looks most closely.
