Not tax advice. Payroll tax math for trade business owners with an S corporation. Figures are from the Social Security Administration’s October 2026 announcement. Work out your own salary with your CPA.
Quick answer
The 2027 Social Security wage base is $192,300, up from $184,500. Wages above that aren’t subject to the 6.2% Social Security tax. Medicare’s 1.45% has no cap.
- Max Social Security tax: $11,922.60 for the employee and $11,922.60 for the employer, $23,845.20 combined.
- For S-corp owners: salary up to $192,300 costs 15.3% in combined payroll tax. Above it, an extra dollar of salary costs only 2.9%, or 3.8% once you pass $200,000. The higher your reasonable salary, the less the S corp saves you.
- Sole proprietors: self-employment tax’s Social Security part maxes out at about $208,230 of net profit.
- Owner salary still has to be reasonable. A low salary means less payroll tax, but also smaller 401(k) contributions and Social Security benefits, and more audit risk.
On this page
A lot of HVAC, plumbing, and electrical owners elect S corp status for one reason: payroll tax. You pay yourself a salary, run payroll tax on that, and take the rest as distributions without the 15.3%. The Social Security wage base sets where that math changes, and it goes up every January.
The 2027 numbers
| 2026 | 2027 | |
|---|---|---|
| Social Security wage base | $184,500 | $192,300 |
| Social Security rate (each side) | 6.2% | 6.2% |
| Max Social Security tax, employee | $11,439.00 | $11,922.60 |
| Max Social Security tax, employer | $11,439.00 | $11,922.60 |
| Max Social Security tax, combined or self-employed | $22,878.00 | $23,845.20 |
| Medicare rate (each side) | 1.45%, no cap | 1.45%, no cap |
| Additional Medicare tax (employee only) | 0.9% on wages over $200,000 single, $250,000 joint, $125,000 married filing separately (not indexed) | |
| Social Security COLA for benefits | 3.6% | |
Sources: Social Security Administration COLA announcement; Journal of Accountancy, October 2026; Keiter CPA. Combined and self-employed maximums calculated as 12.4% of the wage base.
How the wage base works
Social Security tax (OASDI) applies to wages up to the wage base, then stops for the rest of the year. Your payroll system should stop withholding the 6.2% once an employee’s year-to-date wages hit $192,300, and stop the employer’s matching 6.2% at the same point. Medicare keeps going on every dollar.
For a sole proprietor or single-member LLC, self-employment tax works on 92.35% of net earnings. So the Social Security part of SE tax maxes out when net profit reaches about $208,230 ($192,300 ÷ 0.9235). Above that, you pay only the 2.9% Medicare part, plus 0.9% Additional Medicare tax over the threshold.
What it means for S-corp owners
In an S corp, you’re an employee of your own company. Your salary is subject to payroll tax like any tech’s. Profits passed through as distributions are subject to income tax, but not Social Security or Medicare tax. The table shows combined employer and employee payroll tax at different owner salaries in 2027:
| Owner salary | Social Security (12.4%) | Medicare (2.9%) | Additional Medicare (0.9%) | Total payroll tax |
|---|---|---|---|---|
| $60,000 | $7,440 | $1,740 | $0 | $9,180 |
| $100,000 | $12,400 | $2,900 | $0 | $15,300 |
| $150,000 | $18,600 | $4,350 | $0 | $22,950 |
| $192,300 | $23,845 | $5,577 | $0 | $29,422 |
| $250,000 | $23,845 | $7,250 | $450 | $31,545 |
Additional Medicare tax shown at the $200,000 withholding threshold; your actual liability depends on filing status. Excludes FUTA and state unemployment.
The takeaway: going from $150,000 to $192,300 in salary adds $6,472 in payroll tax. Going from $192,300 to $250,000 adds only $2,123. If your reasonable salary is near or above the wage base, the S corp saves you a lot less than your buddy with a $60,000 salary thinks it saves him.
Example: sole prop vs. S corp
A one-truck plumber nets $200,000 in 2027 before paying himself.
| Sole proprietor | S corp, $80,000 salary | |
|---|---|---|
| Amount subject to SE or payroll tax | $184,700 (92.35% of $200,000) | $80,000 |
| Social Security | $22,903 | $9,920 |
| Medicare | $5,356 | $2,320 |
| Total | $28,259 | $12,240 |
That’s about $16,000 less payroll tax with the S corp. Subtract the costs of running payroll, the extra business tax return, state unemployment tax on the salary, and any state franchise tax, and the real savings are smaller. The comparison also ignores income tax effects, like the deduction for half of SE tax and the QBI deduction. It’s a starting point for the conversation with your CPA, not the answer.
Reasonable compensation
The IRS requires S-corp shareholders who work in the business to pay themselves reasonable compensation before taking distributions. There’s no published dollar figure. The question is what you’d have to pay someone else to do what you do.
For a trade owner, that’s usually two jobs: running calls like a lead tech, and running the company like a general manager. Factors that matter include your training and license, your hours, what comparable businesses pay for those roles, and how much of the profit comes from your own labor versus your techs.
The case owners cite is David E. Watson, P.C. v. United States (8th Cir. 2012). An accountant paid himself a $24,000 salary and took large distributions. The court agreed with the IRS that reasonable compensation was about $91,000 and upheld the employment taxes on the difference. A salary that’s a fraction of what you’d pay a lead tech is exactly what draws that scrutiny.
What a low salary costs you
- Retirement contributions: a solo 401(k) or SEP employer contribution is a percentage of your W-2 wages, up to 25% of compensation. A small salary means small contributions.
- Social Security benefits: your future benefit is based on covered earnings. Years of $40,000 salary on a $250,000 business build a smaller check at retirement.
- QBI deduction: the One Big Beautiful Bill Act made the 20% qualified business income deduction permanent. Your salary reduces QBI, but above the income thresholds the deduction can be limited by W-2 wages, so salary interacts with it. Your CPA should run both.
- Loans and mortgages: lenders look at W-2 income. A thin salary can make it harder to qualify.
- Audit risk: low salary plus large distributions is the pattern the Watson case is about.
One cost that doesn’t go up: if you’re a more-than-2% shareholder and the company pays your health insurance, the premiums go in Box 1 of your W-2 but are generally exempt from Social Security and Medicare tax if paid under a plan. Ask your payroll provider to set it up correctly.
Two jobs or two companies
Each employer applies the wage base separately. If you get a W-2 from your S corp and another W-2 from a second job or a second company, both can withhold 6.2% up to $192,300. The excess employee withholding comes back as a credit on your Form 1040 if you overpaid across employers. The excess employer share doesn’t come back. If you own two companies and pay yourself from both, ask your CPA whether a common paymaster arrangement makes sense.
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